Thursday, June 9, 2022
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US is bedrock of any global share portfolio

Originally written for The Australian

The US is far from perfect.

The people there call their main meals “entrees” after a French word meaning “entrance”.

And the political system has become so partisan that it is impossible to appoint a judge to the highest court in the land without months of bickering, insults and mud-slinging.

But if my first international business trip for three years has really highlighted anything about the US, it’s that its market should remain the bedrock of any global share portfolio.

First, the US is simply immense.

That’s in terms of the number of opportunities and the size of the economy. With thousands of companies listed on the major exchanges alone, you can build a diverse, resilient portfolio and find businesses capitalising on just about any trend or theme you can think of.

And, if you happen to find a wonderful business at an early stage, the size of the US economy can make for decades of growth.

Nothing there is easy, though. Just ask the plethora of Australian companies that have headed to the US, touting the size of the opportunity, only to come home endowed with an expensive dose of humility. But when it works, it can work big.

Our International Shares Fund is invested in a small real estate business called Fathom Realty. Its branchless agency model is proving highly attractive to real estate agents, with roughly 8000 having already joined the Fathom network (growth of about 70 per cent over the past 12 months). In Australia, that would already be an industry giant. ASX-listed McGrath, for example, has fewer than 1000 salespeople.

The US has more than one million real estate agents in total. If Fathom keeps winning, it could eventually be 10 times the size it is today.

Second, a UK-listed company the same size as Fathom is almost impossible for us to invest in. Perhaps recent broker research restrictions have had an impact. Perhaps it is simply the lack of investor interest in the region.

But whatever the reason, traded liquidity (that is, the average volume of shares traded per day) has evaporated in European and UK stocks.

We’ve owned shares in UK erasure software business Blancco Technology Group for years. Blancco and Fathom are almost identical in currency-adjusted market capitalisation. But daily turnover in Fathom’s stock is more than 10 times what we see traded daily in Blancco today. And Fathom is considered very illiquid in the US context (though not unworkable for us). Blancco, in contrast, is one where we have to manage liquidity carefully.

By funds management standards, Forager Funds is tiny. But we also add most of our value at the smaller end of the market, and the US has almost become the only game in town for that.

Third, the US economy is a relatively self-sustaining beast. On my stop-off in London recently, the UK consumer was everyone’s main concern. Gas prices have tripled. Mortgage costs are rising. And Brexit’s impacts on supply chains are still causing plenty of issues.

Inflation is a huge concern in the US, too. But the country is far more self-reliant. It is a net exporter of oil and gas and agricultural commodities. Its domestic economy is dominated by internal consumption. And it shares borders with two relatively friendly neighbours, both of whom are too small to do anything if they ever decided not to be friendly.

Again, none of that guarantees investment success. But it does mean you are less likely to be buffeted by macroeconomic or geopolitical risks that are completely outside your control.

Finally, America remains an incredibly dynamic place. The Forager team recently met with more than 60 US companies over two days at a California conference. Many share prices have fallen significantly, but from gene editing and cell therapies to electric vehicles and commercial marijuana, investors remain incredibly willing to fund nascent industries.

Most of them will fail.

And last year’s sharemarket bubble may have done more harm than good for many.

But whatever trends take hold over the coming decades, US companies will remain at the forefront.

After all, most of the world’s current crop of big businesses – think Google, Apple and Facebook – were born in America. The vast majority of the coming crop will probably be born in the same place.

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