Up in US stocks
SKAGEN Global has increased its exposure to the US by 30 percent in a year in which the US stock market rally has ground to a halt.
The US exposure has contributed positively to the fund's return so far this year, both in absolute and relative terms.
Companies light the way
At the start of 2015, US stocks accounted for 30 percent of the SKAGEN Global portfolio. After the first three quarters of the year, this figure has risen to 39 percent. This is the highest the US weighting has been since the fund was launched in 1997. By way of comparison the fund's benchmark index, MSCI AC World, has 56 percent of its holdings in US stocks.
To put this in a historical perspective, at the bottom in 2002, US stocks constituted only four percent of the fund, versus 56 percent for the MSCI World Index. Then, as now, it was the pricing of the companies that determined SKAGEN's exposure to various countries. The same holds true for all our other equity funds.
A relatively strong US economy going forward will be a key earnings driver, both for US and global companies.
Didn't jump aboard the US train
SKAGEN Global did not increase its US weighting merely to jump aboard the US train, which has, in fact, been left behind at the station this year. The train is, in our view, laden with many relatively high priced heavyweights within healthcare, social media and new technology, such as the streaming service, Netflix.
It is, as always, our value-based investment philosophy that forms the basis for our increased US exposure. So far in 2015 the market has also started to put a higher price on our Unpopular and Under-researched US companies.
After the first nine months of the year, four out of the five biggest contributors to SKAGEN Global's performance are US based companies, namely General Electric, AIG, Google and Citigroup. All four companies are among the fund's top ten investments. The stronger US dollar has also played a part in supporting the positive contribution this year.
The above-mentioned four US companies are priced at between 8.4 and 18 times next year's expected earnings. The 'cheapest' among these is Citigroup while Google is the most 'expensive'.
The fact that we, as value managers, have stocks priced at a P/E of 18 may appear slightly counterintuitive. Nevertheless, as long as Google continues to deliver impressive organic growth of 20 percent per year, it will continue to get the green light on our value calculator. Based on the information we have today, however, the Google share is beginning to approach our target price – for further details, see our latest status report.
The broad US S&P 500 index is priced at 21 times the companies' earnings, based on the past 12 month's ongoing earnings. Despite the record-high profit margins, investors still expect earnings growth next year, which means that the P/E level for 2016 falls to around 16. This is in line with the pricing of the world index.
SKAGEN Global's portfolio is priced at a discount of around 25 percent. The discount may decline if active value-based management becomes more popular among investors. We may already have seen the first signs of this.
Rewarded for delivering
The recent share price performance, along with investors' reactions to corporate earnings for the third quarter, shows that investors are now placing more importance on each company's results. Those that deliver will be rewarded, while those that disappoint will be punished.
After several years in the shadow of popular growth shares, we of course hope that our value-based investments will come back in fashion. The autumn has so far been relatively good for SKAGEN Global and our other equity funds.