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QD view – US election, why worry?

Election day is edging closer in the US and the rhetoric is ramping up. We managed to catch up with Dean Orrico, the manager of Middlefield Canadian Income Fund (the subject of last week’s article) in the weekly interview and he reiterated his observation that Biden is likely to win the Presidential election. The more dramatic result would be for the Democrats to win both houses of congress. Then Dean thinks we could see considerable new economic stimulus in the US and important policy changes in areas such as renewable energy and infrastructure investment (which could be good news for trusts such as Ecofin Global Utilities and Infrastructure and Premier Global Infrastructure).

Over the past year, the dispersion of returns within the North American sector has been considerable. At the top end is Baillie Gifford US Growth Trust, which has more than doubled its NAV per share over the past year. Its success speaks to investors’ love of new technology. Big positions in Tesla, Shopify, Amazon and Wayfair (which together represented almost 30% of the fund at the end of September) have soared in price. The fortunes of these companies are not that dependent on the actions of politicians (unless the sector is targeted with new taxes).

The largest trust in the North American sector is JPMorgan American. Longstanding manger, Garrett Fish was replaced as manager of this trust just over a year ago. The portfolio is now run by Jonathan Simon and Tim Parton who manage a high conviction (concentrated) portfolio of large cap stocks alongside a portfolio of smaller companies, which can represent up to 10% of the fund. Encouragingly, over the year to the end of September 2020, JPMorgan American beat its benchmark (the S&P 500 Index) by a modest amount. The portfolio is more broadly based than that of the Baillie Gifford trust.

As a house, JPMorgan is starting to question the valuations of some large cap tech stocks. It suggests that there might be better value in smaller companies.

If you are looking for US smaller company trusts, there are two to choose from. JPMorgan’s has a slightly better track record than Jupiter’s over most time periods, although Jupiter US Smaller Companies is ahead over three years. The returns on US smaller companies have lagged those on large caps for quite a while now, a reversal in fortune would be big news. The outlook for the Jupiter fund is somewhat clouded by the impending retirement of the manager, Robert Siddles. The Jupiter fund has a big allocation to the healthcare sector, which accounted for about 27% of the trust at the end of September. Healthcare is one of the sectors traditionally thought to be sensitive to the outcome of the election.

The managers of International Biotechnology (which had 93% of its assets in the US at the end of September) think that this year, while sentiment may have a short-term effect on prices, the election result is unlikely to have a dramatic effect on the sector. There is bipartisan support for reining in drug prices by tying US prices to those in other developed markets and widespread condemnation of any company thought to be price gouging. Biden also distanced himself from the ‘Medicare for All’ policies of Elizabeth Warren and Bernie Sanders. The managers think a much greater positive driver of returns in the healthcare sector is likely to continue to be the pace of new drug developments and approvals.

In our view, if Trump retains the Presidency and control of the Senate, we wonder whether the recent message that COVID is nothing to worry about and the bigger problem of the economy might translate into minimal additional stimulus. By contrast, a Democrat victory will likely mean much higher taxes. A disputed result would be the worst of all possible worlds and could pull back markets for a while. However, many companies can grow and thrive regardless of the political situation. Their long-term outlook may be unaffected.

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