Uncle Sam need not be the black sheep of investors' portfolios

After major scares in the summer, America out-performed the world's major markets in 2011 and its companies could be a good bet for the year ahead

The Apple store in Grand Central Station (Getty Images North America )

Sentiment changes fast in the world economy. Back in August when the US government found its national debt rating downgraded it seemed that the world's largest economy was heading for the buffers at a rapid rate.

But that was then and this is January. A couple of months of positive growth and brighter job news combined with the mess of Europe – the other traditional home for investors – has shifted the prism of investor sentiment. Uncle Sam isn't looking quite so ready for the abattoir after all it seems. Even the basket case of the US housing market is showing a tiny bit of life, while the automotive industry – a running joke for much of the 2000s – has stepped firmly back from the brink.

"While the US economy isn't immune to the continued problems in Europe and accompanying volatility, recent data has been much better than expected," says Darius McDermott, the managing director of Chelsea Financial Services. "Perhaps surprisingly, the US outperformed all other major developed markets last year, up around 10 per cent compared with the UK market, so investors in the region were well rewarded in 2011," he adds.

And there are good reasons why the US stockmarket is insulated in a way the UK and other markets aren't: "We see the US as probably the least vulnerable market to systematic shocks and, unlike the UK and emerging markets, less sensitive to a eurozone recession - just 18 per cent of S&P500 profits derived from Europe," says Michael Lally, the Investment Director at Thesis Asset Management.

The often derided great American consumer is at the heart of this, according to Adrian Lowcock, a director at independent financial advice firm Bestinvest. "The US economy is more focused on its domestic economy than, say, Japan which is a major exporter," he says

"There are also signs that the US consumer is in recovery and as they contribute 70 per cent to US GDP and around 15 per cent to global GDP this will be seriously good news for US corporations. Even the US housing market, which has been a significant drag on economic growth, has started to show signs of having hit the bottom," Mr Lowcock adds.

Even the seemingly never-ending presidential race, which has just seen the first tranche of Republican primaries is not set to disrupt the course of the US market. "History tells us that the US market does well in a presidential election year and Obama's re-election hopes are currently resting on a return to economic strength. But remember America was the one major economy to have performed better in the last quarter of 2011 when compared to the first," says Stephen Barber, an economist at Selftrade.

What also seems to be helping investors in the US is the traditional position of the dollar as the world's reserve currency, which has helped increase its worth of late, particularly against the euro. And any further shocks to the eurozone and world economy as a whole could see another flight to the dollar – which is potentially good news for UK investors with their money stateside.

It is a matter of fact that UK investors placing their money overseas can not only gain – or lose – with capital appreciation but also through shifts in the dollar's value against the pound. If the dollar appreciates against the pound in 2012 then investment returns will be boosted for UK private investors in the US and vice versa.

Perhaps this currency risk explains why UK investors so often pass up the chance to invest in America, something that Mr McDermott finds somewhat surprising: "UK investors tend to have an extremely small proportion of their portfolios invested in the US, despite the historic and language links. Investors often miss out as a result as it still is comfortably the world's largest economy with a lot of truly amazing profit-making companies."

And US corporates have rarely looked in such rude health according to Mr Lowcock: "The country has a large number of global players which are cash rich and run by experienced and astute management teams. As such they are able to take advantage of opportunities in not only the US but Europe, Asia, Latin America and other emerging markets," he says.

However, the performance of the managers investing in these firms is less stellar. Mr Lally says this is the biggest concern for investors looking to get a slice of the American pie: "Our main concern is the very small percentage of active managers who have outperformed their personal benchmark: just 27 per cent last year and only 20 per cent in 2010."

No wonder, with such shoddy performance a quick scan of IFA firm Hargreaves Lansdown's 150 recommended funds reveals that just one, M&G American, managed by Aled Smith, hails from across the Atlantic. The problem according to Mr Lowcock is that the US stockmarket "almost runs too efficiently, as a result active fund managers have really struggled to add value to their investments." In other words, there aren't the opportunities to outperform because the stock analysis is so strong, if you see an undervalued share in the US it's pretty likely a competitor has seen likewise.

As a result of the poor track record of US active fund managers, Mr Lowcock recommends that investors simply go for a tracker or exchange traded fund which mirror an index's movements. His favourite is the HSBC America fund. But tracker funds have no chance of achieving outperformance. In fact, factoring in fees they are always going to marginally underperform the index they shadow.

Traditionally, US firms have not paid the sort of dividends as their UK counterparts. But the latest analysis from JP Morgan Asset Management shows that last year the biggest S&P 500 companies paid an average dividend of 2.21 per cent which may not sound much but when set against a return of just 1.87 per cent on 10-year US government debt it looks more attractive.

So when it comes to which fund to choose Mr McDermott urges investors not to forget the potential for dividends to be earned: "I'd recommend the AXA Framlington North American which has an excellent track record in its peer group, or for those looking to make the most of reinvested dividends, or who want some income, the Jupiter North American Income fund."

Investing in America

How to make profits Stateside

Direct share investment

The riskiest type of investment, but it also has the potential for the biggest reward. Investment in the McDonald's, Apples and General Electrics of this world used to be the preserve of either fund managers or top-end private investors who could afford major fees and stockbroker advice services. Now it's possible to buy ever smaller bites of US shares from a host of UK stockbrokers, and dealing fees have been falling too.

Managed unit or investment trust

These funds invest in a range of US company shares – sometimes holding 70, 80 or even more. Stocks are selected by a management team looking at the business fundamentals of individual companies. Most funds will not only buy and sell shares, hoping to bank a profit, but also use such complex instruments as future contracts, all in a bid to maximise returns. However, the human element means mistakes can be made, and critics suggest that many managers investing in the US are performing poorly.

Tracker fund or exchange traded funds

These investment vehicles will usually look to closely mirror the performance of an underlying stockmarket index. In their simplest form these investments will replicate the S&P 500 index by buying and selling company shares as they increase and decrease in price. In their more specialised forms these investments will mirror the performance of a subset of the wider US stock market, for example smaller companies or technology firms. Charges and dealing fees tend to be very low, and investments can be bought and sold quickly.

UK companies which are big Stateside

Don't want to take the risk of using your pounds to invest in company shares priced in dollars but still want some exposure to the States? Then one possibility is to buy shares in UK-listed companies which do the majority of their business with US consumers and companies. British American Tobacco, GlaxoSmithKline, Unilever and (despite the Gulf of Mexico disaster) BP all do a substantial amount of business with the US.