Brundige expects US large-cap rebound
Manager of Pictet's US Equity Selection fund Chace Brundige believes recent problems have led to re-pricing of risk and marked a turning point for larger companies
US large-cap growth stocks are coming back into favour after six years of underperformance, according to Chace Brundige of American asset manager Waddell and Reed.
Brundige runs Pictet's US Equity Selection fund, a Luxembourg-domiciled vehicle with $488m under management.
He believes the crisis in the housing market has led to a re-pricing of risk and weakening profit cycle among US companies, but large-cap growth stocks have now reached a turning point.
Brundige added that growth companies are also cheap by historical standards.
The fund invests in stocks that can demonstrate the potential for sustainable growth, rather than those that can grow at a rapid rate in the short term.
Brundige also looks for those with a competitive advantage in the marketplace, such as Apple, which has had phenomenal success with products like the iPod, and makes up 4.7% of the portfolio.
He looks for a stock's source of revenue growth before buying into it, whether or not a biotech firm has a particular drug in the pipeline, for example.
But the manager added there is a degree of risk here because the success of a particular product can be hard to assess.
Brundige avoids companies that expand by acquisition rather than organically because of the risks associated with integration and access to capital markets.
He gives the example of notoriously beleaguered companies Enron and Tyco, which "were creative with their accounting", according to Brundige.
He added: "It is hard to analyse this kind of risk if you cannot go into the books like an auditor would."
The fund's 45 to 60 stocks are concentrated in technology, consumer, financials and healthcare, which the manager said are key growth sectors.
The vehicle's constraints dictate it can have up to two times market weight in these sectors, and 1.5 times market weight or 5% in any one stock.
Brundige said: "We are underweight consumer-facing stocks now because of the US housing market situation and the consumer slowdown. The situation could get worse than the market thinks, and we have tried to position the portfolio to take account of that."
He also likes US companies that have international exposure as this enables him to hedge against currency risk stemming from the weak dollar.
He commented: "US companies in our benchmark index, the Russell 1000 Growth, have 35% international exposure.
"It was not a conscious decision on our part to invest in international companies, but these are more attractive at the moment.
"For example, Las Vegas Sands hotel and gaming company has a strong presence in Macau and a good relationship with the Chinese government.
"The group recently won a contract in Singapore, is positioned to get more contracts there, and its management team is very impressive."
Despite weakness in the housing and retail sectors in the US, Waddell & Reed predicts upward revaluation of high-quality large caps, along with solid earnings growth and GDP growth of around 1.5% for the next few quarters.
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