The US market offers more than big tech names, says Tony DeSpirito. Dividend growth is key.
As US managers, we understand many of the arguments. “It’s all about FANGs – Facebook, Amazon, Netflix, Google,” is something we hear a lot. Certainly, the FANG stocks have performed well and led the market higher. But the US market is the broadest and most diverse in the world and has far more to offer investors than just a handful of large technology companies.
The FANGs do not pay dividends so are not part of our universe. However, we retain an overweight position in technology, finding plenty of companies that fit our high quality and dividend growth criteria. A rising number of businesses in the sector have added dividend payments to shareholders as a viable use of their high cash balances, rejecting the notion that IT firms can only add value to their investors via share price growth.
Equally, it is important to not think that technology is the only show in town for growth. There are plenty of areas locked into long-term structural change that do not command some of the giddy valuations of parts of the technology sector. For example, the portfolio holds an overweight position in healthcare, where the ageing population continues to drive demand.
This is a long-term demographic shift and an important support for healthcare firms. We particularly like innovative companies focused on improving efficiencies because rising costs are a challenge for the healthcare sector. Innovation and strong cost control can work hand in hand to improve efficiency, and companies that can help have a natural tailwind. We are also looking at investing in pharmaceutical firms that have increased their research and development capabilities.
“It’s expensive,” is another familiar cry about the US market. Yes, the valuations of certain high-growth companies are substantial, which skews the overall picture for the US market. The market has also been prone to some exuberance in the value it assigns to new companies. These firms are undoubtedly disruptive but may never make profits.
It is important to remember that this is not most of the market and not where we choose to focus our attention. We still find plenty of high-quality businesses that are making good returns for shareholders and paying attractive, growing dividends.
There is also the perception that it is difficult to beat the index. The US is an efficient market but it does not mean that active investment managers cannot provide a differentiated return. For many investors, a growing income is a far greater priority than capital growth. To our mind, in the US market, investors need a manager who is genuinely active and providing something different to the index. In this way, the BlackRock North American Income Trust can sit comfortably alongside index exposure.
More recently, investors have started to worry about the US market’s long period of outperformance. Can it last? Is the economic and market cycle turning? We believe there is more room for this cycle to run – household finances look to be in good shape, while inflation is moderate and government spending is increasing. Certainly, the ongoing trade tensions are a source of concern but we believe we can navigate these problems in the portfolio.
It is worth adding that if the cycle does turn, a passive option may not be protective and will simply track the index lower. Holding an active manager who can make strategic shifts could prove crucial in this environment.
Our approach on the Trust is to look for high-quality businesses – in terms of their management but also their franchises and balance sheet strength. We want to find those businesses that have shown a disciplined approach to paying dividends but which, in our view, offer significant prospects of dividend growth in years to come.
For more information on this Trust and how to access the potential opportunities presented by North American markets, please visit www.blackrock.com/uk/brna.
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