Ask the Expert: The S&P 500 has outperformed even the Japanese stock market this year — but can investors still make money?

Emma Wall. Hello and welcome to the Morningstar TV series, Ask the Expert. I’m Emma Wall and here with me today is Morningstar analyst, Oliver Kettlewell.

Hello, Oli.

Oliver Kettlewell: Hello, Emma.

Wall. So, people may think that Japan has been the best performing stock market so far this year, but youre here to tell us that actually it’s been the U.S.?

Kettlewell: That’s true; actually the U.S. has done better. Right at the beginning of the year you remember that the U.S. got off to a great start, the resolution of the fiscal cliff issues meant the first trading day got off to a really good start and it’s continued since. I think one of the reasons why it has continued, is because of the fundamental facts have been better for the U.S. economy. The U.S. has been better at creating jobs, a lot of fund managers talking about industrial renaissance with a lot of jobs coming back to the U.S. The energy sector is pretty much booming right now. The housing market has picked up; consumer spending has been good. So all of these factors have kind of under pinned companies and share prices and the S&P is actually up 20% today in sterling terms, which has just nudged the Toppix index return in Japan and a lot better than the FTSE All Share, which is 10%. So yeah the S&P the U.S. equity has done better.

Wall. Great for investors who already have exposure. However, for those looking to come in at this point, is the run over?

Kettlewell: Its a good question and its something we often put to global equity fund managers who often have a large allocation to the U.S. and there are contrasting views at the moment. On the one hand, there are those that are saying because U.S. has had a such a good run, P/Es are looking pretty stretched and allocating money away from the U.S. and I think in that camp I would put something like the Artemis Global Growth Fund, which has a more value tilt to it, which is going into more areas like Europe and emerging markets which look better on a valuation standpoint.

On the other hand, you’ve got, say, funds such as the Fundsmith Equity Fund run by Terry Smith, who have historically had a large weighting to U.S. companies and Terry Smith always says that’s because the U.S. is home to some of the best companies in the world, great franchises, robust business models; names like Kellogg’s, Coca Cola, these are names which are not exactly going to fall off a cliff. We’re going to keep sort of buying these products. So, fund managers, such as Terry Smith, would probably argue that there is reason why these stocks trade at premium and that could continue.

I think it is one area I can highlight for you within the U.S. equity market which is perhaps arguably over-priced is U.S. REITs, thats real estate investment trust, i.e. property stocks. The reason for that is that a lot of investors through the search for yield have been kind of shunning bonds and putting their money into U.S. REITs, which have had high yields. However, this has now inflated the prices, push the dividend yield down, and they are looking quite overvalued. So I think thats perhaps one area of the U.S. market which is looking a bit overvalued, U.S. REITs.

Wall: For investors that do have conviction about the market, however, what funds do Morningstar rate?

Kettlewell: I think for the investor who wants U.S. exposure and who remains quite bullish, then I would say the Dodge & Cox Worldwide U.S. Stock Fund would be a good fund to have. This is a Gold-rated fund; we recently rated this fund this year. The investment team tends to go into kind of troubled unloved areas, which do well when the economy rebounds, so it’s done well year-to-date. It will likely continue to do well if the economy and the markets do well.

On the other hand, if you want U.S. exposure and you perhaps are a bit more defensive, bit more cautious, then I would say that the Cullen North American High Dividend Value Fund, which is a bit of a mouthful of a name, is a good one. It’s a Bronze-rated fund. It’s kind of like a super defensive dividend fund, if you like, and it tends to use cash tactically. It’s not had a good year-to-date, because it’s been weighed down in a lot of defensive sectors. But that means if the economy or the market is going through bit of a tumble, it’s likely to hold up better than other funds. So I’d say those are two funds which investors can get access to the U.S. market, but in contrasting ways.

Wall: Oli, thank you very much.

Kettlewell: Thank you.

Wall: This is Emma Wall for Morningstar TV. Thank you for watching.