Trump and small caps are key to returns from the US
Understanding the impact of Donald Trump’s policies, coupled with realisation that the bulk of earnings are sourced domestically by US smaller companies, leads to the conclusion that there is no better way to play US exposure than via US small caps, argues Nicolas Janvier, portfolio manager for the Threadneedle American Smaller Companies fund.
Janvier, who joined in 2014 as a portfolio analyst in the US Equities team, and is responsible for researching US companies across the materials and utilities sectors, estimates that the companies he looks at source 80%-100% of their revenues from the US.
However, equally important is recognising valuations, given the run that US markets have had – indeed, broader indices of larger companies such as the S&P 500 reached record or near record highs in recent days.
Janvier says this run means that there is a “need to become selective as an active manager”.
For investors outside the US there is also the factor of scale to consider; smaller companies in the US may actually be relatively large compared to smaller companies in other markets, Janvier notes; he tends to look at market capitalisation in the range of $500m-$10bn.
Given the influence of Donald Trump in US policy making, there has been considerable interest in what this means for investment decisions, Janvier says of the meetings he has had with investors in his fund across Europe.
The ‘America First’ principle gives a sense that Trump may be good for US economic growth, which in turn is of benefit for a portfolio that constitutes holdings that source most of their revenues from that country.
This also plays out in other ways, such as regarding currency risk; this can impact on competitive dynamics, such as if Harley Davidson is hit by imports because of a stronger dollar.
However, Janvier adds that he avoids worrying about the things he cannot control in terms of stockpicking.
Liquidity is always a key issue for any small cap fund manager. Janvier explains that he sees the greatest challenge in the $500m-$700m market cap area.
“But if you are going to invest there, then you apply a higher hurdle, for example, a longer holding period and more confidence around the trajectory of businesses,” he says.
In terms of the capacity issue, he says the fund will not grow beyond $4bn as “that’s where liquidity starts to become an issue.”
Note: Nicolas Janvier is taking part in the InvestmentEurope Mediterranean Summit Venice.
Previously, he spent eight years with Columbia Management, where he worked as a portfolio manager in the Value Strategies team, focusing on US mid and small caps companies. Before that he was a portfolio manager with the Private Bank at Bank of America.