Think US companies and your mind might go straight for the likes of Apple, Coca-Cola or Nike before you’ve even engaged your brain.
Big names like these are part of everyday life because we use their products and understand what they do. They tend to attract the attention of the news channels and general public because of their size and social relevance but analyst teams and fund managers are watching them as well. Investors often want access to the big companies they recognise and use, like Facebook, Disney and Visa, so this tends to be where the analysis gets done, with teams around the globe poring over the latest iPhone sales figures or Netflix monthly user numbers.
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The difficulty in everyone analysing the same companies comes when investment teams try to find something others haven’t uncovered yet - the information edge. It’s a classic line in investment that the US is a tough market in which to find this edge because the volume of research going on means spotting something different requires either luck or immense skill.
But look further down the scale to some of the mid-size companies and suddenly the opportunity set grows. Mid cap companies’ obscurity relative to their larger peers in the US means they are scrutinised by fewer research analysts, have fewer investors, and experience lower trading volumes, meaning there can be bigger differences in what the market says they are worth and the value analysts have in mind.
The duo aims to provide capital growth and income by investing in US companies in and around the bottom 40% of the North American equity market, as measured by market cap. This is where the managers allocate at least 70% of the fund’s assets, as they try to identify compelling companies mispriced by the wider market.
To equip the fund for different market conditions, Jones looks at three types of company. The bulk of the portfolio is composed of ‘mispriced growers’ – firms the team believes will realise and sustain a significant change over the next two to three years, and whose impact is not appreciated by the market.
These names are complemented by ‘steady eddies’, demonstrating resilient revenue streams and low sensitivity to changing economic conditions.
The smallest allocation is to turnaround opportunities, which at most comprise one fifth of the total portfolio. For Jones, struggling companies deserve a look only when the team has identified a genuine catalyst for recovery.
Companies currently in the fund’s top ten holdings include food, facilities and uniform service provider Aramark, global drug delivery technology provider Catalent, and car sales support platform KAR Auction Services. If you haven’t heard of them, remember that might just be the point.
More on the Schroder US Mid Cap Fund.
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