Donald Lindsey has a high-conviction investment idea, and he’s acting on it. As chief investment officer of the $1.2 billion endowment fund at George Washington University, Lindsey isn’t looking to break into an esoteric market or load up on a new product. Instead, he’s increasing the endowment’s allocation to good old U.S. equities: “I still love the asset class,” he says.
Lindsey, who has captained the Washington-based fund since April 2003, points to three trends that make U.S. shares a smart buy. First, earnings have far exceeded expectations: Share prices reached record highs in the second and third quarters of 2011. Because corporate America has done a great job of cutting costs, it’s fattened its profit margins.
Second, technology is boosting productivity. Third, thanks to their technological prowess, companies both large and small can now do business globally where economies are strong. “Exports are starting to account for a greater amount of U.S. GDP,” says Lindsey, who oversees a total 50 percent equity allocation.
Exports rose to 13.4 percent of U.S. gross domestic product in the third quarter of last year, according to Beth Ann Bovino, deputy chief economist at Standard & Poor’s, compared with 12.7 percent of GDP in 2010 and 10.6 percent in 2000.
Growth prospects for the U.S. economy — Jim O’Neill, chairman of Goldman Sachs Asset Management in London, forecasts 2.5 percent expansion in 2012 — are driving Lindsey’s preemptive strike. “I believe we’re going to see a U.S. renaissance in manufacturing,” he predicts. With transportation and labor costs rising in emerging markets, Lindsey reasons, more production will stay onshore. Meanwhile, rising wages overseas will boost demand for imported goods.
The CIO isn’t alone in his view, at least among U.S. equity managers. “U.S. companies have never been in better shape, aside from the financial sector,” asserts John Buckingham, CIO of $2.2 billion-in-assets AFAM, a manager in Aliso Viejo, California. A self-described “contrarian who avoids sexy stories,” Buckingham says that when U.S. companies trimmed expenses through layoffs and other reductions, they posted major productivity gains. He now expects to see companies looking to grow rather than retrench.
Relatively speaking, U.S. equities have put in a strong performance of late. Yes, the S&P index of the 500 largest U.S. companies had a volatile 2011, lurching from a 14.3 percent plunge in the third quarter back up to 11.15 percent in the fourth before ending the year with a – 0.02 percent return. But emerging markets fared much worse, diving 22 percent. What’s more, dividends pushed the S&P 500 into positive territory: a 2.11 percent return.
Dividends play a big role in the U.S. equity story. A key marker of corporate confidence because paring them back can rock share prices, they rose $50.2 billion in 2011, almost double their $26.5 billion climb for 2010, according to S&P. For the full year S&P reported 1,953 dividend increases, a 13 percent jump over 2010. Only 101 of the roughly 7,000 U.S. companies that divulge dividend information shrank their payouts in 2011, compared with 145 the previous year. “Dividends had a great year in 2011, with actual cash payments increasing over 16 percent and the forward indicated dividend rate up 18 percent,” says Howard Silverblatt, senior index analyst at S&P.
U.S. corporate shares have been propping up global markets, which fell 10.07 percent in 2011. Strip out the U.S. returns — 43 percent of the total — and the drop was 16.64 percent. When American equity markets broke even, investors in them got a bonus, quips Silverblatt.
Reasons to be cheerful about the U.S. market abound, managers affirm. “I’ve been saying for the past year that U.S. equities are the most underowned asset,” notes Philip Tasho, CEO and CIO of $1.6 billion, Alexandria, Virginia–based Tamro Capital Partners. “They’re really a bargain at this point.” And how do America’s travails measure up to the European Union’s sovereign debt crisis and the inflation in places like Indonesia and Turkey? “Whatever problems we have, we solve them more quickly than most countries,” Tasho says.
Compared with Europe and elsewhere, the U.S. is relatively calm, S&P’s Silverblatt agrees. “People are voting with their money,” he adds, noting that a “slight” reallocation to U.S. equity is under way.
Whether that will build to a groundswell is anyone’s guess. Robert Parise, a Chicago-based senior adviser to Midwestern public and corporate pension sponsors at J.P. Morgan Asset Management, doesn’t report a surge in U.S. stock buying among his clientele. But pensions move more slowly than endowments, concedes Parise, who has noticed that plan sponsors are keener to drop underperforming U.S. equity managers. He also sees movement from pure indexing to enhanced indexing or outright active management.
For his part, GWU’s Lindsey won’t hold back on U.S. equities. “Our plan is to keep buying in, because ultimately it’s setting up for a bull market,” he says. • •
