The Briefing: North America

It may be one of the most powerful markets in the world and home to giants of the corporate world such as Apple, Microsoft, and ExxonMobil but that doesn't mean you should invest every spare penny into the United States.

The current situation is a prime example of why that is the case, with US shares now performing worse than the rest of the world when measured by the MSCI All Country World Index-ex US, according to Russ Koesterich, BlackRock's global chief investment strategist.

"The problem is that expectations and valuations are particularly high for US stocks," he says. "US economic fundamentals appear solid but on a price-to-book measure, equities are trading at 60% and 80% premiums versus developed and emerging markets, respectively."

The aim of the Legg Mason US Smaller Companies fund, which was launched almost 11 years ago, is to achieve capital growth by primarily investing in smaller US companies.

However, the US is always worth considering because it remains a global powerhouse and among the most influential economies on the planet. It's also one of the leading global centres for sectors such as technology.

Is this the right sector for me?

Consider investing in this sector if...

• you want focused exposure to US-based companies
• you believe there is still value to be had from US companies
• you are looking to diversify your existing portfolio

Investors that have put their faith in the US have also been well rewarded. IMA North America, for example, is the best performing sector over three years with a 59% return, according to Morningstar data to 2 February 2015.

This means that mainstream North American funds are suitable for just about every investor who is prepared to embrace the risk of investing in equities, according to Patrick Connolly, a certified financial planner at Chase de Vere.

"The US is the largest stockmarket in the world and is home to many of the most successful and innovative companies, so it makes sense for all growth investors to include exposure in their portfolio," he says.

For investors, there are two sectors that focus on this region - IMA North America, which has more than 120 funds from which to choose, and IMA North American Smaller Companies, which has less than 20.

While both are populated by portfolios that buy US-listed stocks, the difference is that those in the latter sector have to invest at least 80% of assets in North American companies that form the bottom 20% by market capitalisation, which means the smaller listed fi rms.

So what are the pros and cons of investing in the US right now? The excavation of shale gas and oil is helping the US move rapidly to a state of energy independence, while the steep fall in the oil price is benefiting individuals (who have more money in their pockets) and businesses, which can reduce costs and improve margins.

However, US stockmarkets are near record highs and many shares are now looking decidedly expensive. Being at this level is also a warning sign because if corporate earnings don’t improve then stocks may fall in the short term.

Nadia Grant, US Equities fund manager at Threadneedle, thinks that, on balance, the US economic recovery is broadly based and is forecasting GDP growth in 2015 of around 3%, which should provide a very supportive backdrop for equities.

"We expect the consumer to account for around two-thirds of this growth," she says. "The fall in the oil price is benefiting US consumers enormously as they are now paying an average $2.14 (£1.41p) a gallon, rather than $3.50 (£2.30) before the oil price drop."

While the sheer number of analysts following US-listed stocks means the market is extraordinarily well researched, it also makes it enormously difficult for managers to find anomalies, enabling them to consistently beat the S&P 500 index.

That means investors should pay serious consideration to whether they want to pay extra for someone to "actively" manage their fund or opt for a so-called passively invested product that simply replicates the index.

Tom Stevenson, investment director at Fidelity Personal Investing, usually prefers active management but in the case of the US he thinks there is some merit in aiming for a low-cost approach and choosing a tracker.

"Active funds find it easier to gain a competitive edge in less well-researched markets, such as many emerging markets, while passives are best for markets like the US that are well-covered by investment analysts and fund managers," he says. "However, it’s important that you do not pay an ‘active’ fund charge for passive management." Whichever route you choose, you will need to closely examine various funds to see whether you agree with their investment philosophy and process. Some will be growth oriented, for example, while others will pursue the goal of income.

The point is you need to be diversified, according to Koesterich. Investing in the US can reap benefits, he agrees, but it’s important to have a cross-section of exposures given the economic backdrop and prospect of US interest rates rising this year.

"The bottom line is US equities can move higher in 2015 but the path is likely to be accompanied by much more volatility," he says.

"We wouldn't abandon US equities but this is a good time for investors to ensure their portfolios are diversified outside the US."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.