Scottish managers of U.S. stock funds are counting on companies such as Time Warner Inc. (TWX), Harley-Davidson Inc. (HOG) and TJX Cos. (TJX) to tap recovering consumer demand in the world’s largest economy.
Producers of consumer essentials have posted the highest proportion of earnings surprises of any industry in the Standard & Poor’s 500 Index (SPX) during the current reporting season, according to data compiled by Bloomberg. Jeff Morris, head of U.S. equities at Standard Life Investments, said his biggest retail holding is TJX, owner of TK Maxx stores.
“Normally when you have bullish market conditions it is cyclical stocks that are pushing to new highs,” Morris, 45, said by telephone from his office in Boston. “Now defensives, consumer staples and health care are doing well. The market doesn’t really look like it should do.”
The strongest consumer spending in two years helped the U.S. economy expand at an annualized rate of 2.5 percent in the first quarter, up from 0.4 percent in the previous three months. The unemployment rate reached a four-year low of 7.5 percent in April and existing-home prices jumped the most since 2005.
Karolina Noculak, a global equities manager at Scottish Widows Investment Partnership, the fund unit of Lloyds Banking Group, said the U.S. recovery is “real” and “sustainable.”
“We are very excited about the U.S. equities market,” Noculak, 30, co-manager of the 29 million-pound ($45 million) SWIP North American Fund, said in an interview at her Edinburgh office. “Debt servicing relative to disposable income is at an all-time low and people feel more comfortable.”
Household debt as a proportion of personal income was at its lowest since 2003 at the end of last year, according to data compiled by Bloomberg. Noculak’s fund has had more invested in durable and discretionary consumer stocks for the past two years relative to benchmarks, she said.
The fund ranks second over three years among 146 similarly managed funds, with an annualized return of 12.8 percent, data compiled by Bloomberg show. She recently sold Brunswick Corp. (BC), a Lake Forest, Illinois-based maker of high-performance boats whose shares have surged nine-fold since July 2009.
Noculak bought Kraft Food Groups Inc., the North American grocery business that split from its snacks business on Oct. 1. Kraft, which owns Jell-O, has risen 25 percent since the separation. She also owns shares in motorcycle maker Harley-Davidson, which has risen more than six times since March 2009.
So-called discretionary consumer stocks such as Time Warner (TWC), the owner of cable networks TNT and HBO, are attracting Marcus Chandler, head of U.S. equities at Kames Capital, the Edinburgh-based fund unit of Aegon NV.
“The companies that generate value for you in the long-run are those with cash generation,” Chandler, 36, said in a telephone interview. “Time Warner is one of the companies that has seen a material change in its fortunes in the past two years. It has very high operational returns and the management understands which levers to pull.”
Time Warner gained 68 percent in the two years to May 6 as Chief Executive Officer Jeffrey Bewkes focused on its TV business, which accounts for 70 percent of sales. He announced plans in March to spin off magazine publisher Time Inc., its worst-performing division.
Standard Life’s Morris also recently added Time Warner to his fund in the belief the company will be able to push profitability higher than the market is expecting.
The other four companies where Chandler has invested most relative to benchmarks include Chevron Corp. (CVX), the world’s third-biggest energy company by market value, Emerson Electric Co. (EMR), a maker of air conditioner compressors, United Technologies (UTX) Corp., owner of the Pratt & Whitney aero engine maker, and Marathon Petroleum Corp. (MPC) Chevron and United Technologies rose 14 percent this year as of May 6, while Emerson gained 8.2 percent.
Chandler took over managing the 25 million-pound Kames American Equity Fund in December after several years of underperformance. It has risen 15.3 percent this year as of May 3, compared with the 14.8 percent average for competing funds, data compiled by Bloomberg show. It advanced 2.6 percent over the past five years, half the average return of its peer group.
Noculak has a stake in Marathon, a Findlay, Ohio-based refiner, to take advantage of the U.S. shale-energy revolution. Refiners account for three of the top 10 performers in the S&P 500 Index in the past year, with Marathon more than doubling.
Morris at Standard Life has his 45 million-pound American Equity Unconstrained Fund (STAEGIR) invested in stocks such as Ford Motor Co. (F) and Borg-Warner Inc. (BWA), the Auburn Hills, Michigan-based maker of turbochargers that he expects to benefit from structural improvements in vehicle fuel efficiency, as well as TJX.
The fund rose 13 percent in the past year, compared with the average 15 percent return of similarly run funds, according to data compiled by Bloomberg. Recent purchases include Dick’s Sporting Goods Inc. (DKS), Morris said in an e-mail.
“One of our most overweight positions is consumer discretionary,” he said. “The consumer area offers a lot of stock-specific opportunity.”
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