Volatility set to remain a thorn in side of US investing, says UBS’ Grant Burghman

Market volatility set to remain a market fixture in the US, suggests Grant Burghman, client portfolio manager of the UBS US Growth fund.

Indicators suggest the US economy has settled into a period of slow ­economic growth.

An expectation has developed that economic weakness seen through Q3 2011 may extend for several ­subsequent quarters in the face of the current uncertainty.

Investor confidence has declined ­following the recent S&P downgrade of US debt.

We believe the downgrade did not curtail the borrowing power of the US government, but has ushered in fiscal austerity programmes that will be a headwind to economic recovery.

During Q3, we reduced the cyclical exposure in the portfolio. The UBS US Growth fund moved to a sizeable underweight in energy, increased its underweight in industrials and reduced the materials sector weight by selling our fertiliser and ­atmospheric gas holdings.

The team took a full review of all of its holdings during the recession of 2008 and 2009, and subsequently reduced or eliminated holdings that experienced a large decrease in ­earnings.

While we do not expect the global economy to slow to that level, we believe it was prudent to reduce the risk from these cyclical ­holdings because of their correlation to ­economic growth.

The fund continued to add to our holdings in our “elite” growth bucket; those companies we believe to have characteristics of being in a hyper phase of growth, which can lead to mispricing by the market.

At the end of the quarter, our elite growth holdings are at the high end of our historical range.

We increased our holdings in the payment processing space and consumer discretionary companies that we believe are well positioned, both domestically and globally, to take market share.

Our overweight to traditionally more economically sensitive ­sectors such as consumer discretionary and IT is bottom-up driven.

The ­companies that we own in the elite growth space should have years of above nominal GDP growth ahead of them. In addition, we have identified a select number of dominant global growth companies that are taking share overseas.

While consumer spending in the US as a whole may continue to face some headwinds, we believe US-based companies with strong brands and defensible market positions are very well-positioned to continue to grow and take share outside the US domestic market.

We continue to expect volatility to remain a fixture of the market for the foreseeable future, as the developed countries are forced to come to terms with their structural fiscal deficits.

Financial institutions may require government support through this transitional period.  

Grant Bughman is client portfolio manager of the UBS US Growth fund

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