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Hello and welcome to this US Equities Fond Select Mask class. I'm Mary Palmer. There's plenty to get through at the moment. It's a very topical time to be talking US equities. We're in a new paradigm. What's worked before necessarily may not work again. And where are the opportunities? Well, thankfully we have two fund managers to unpack all of this and we have a fund selector too. So Paul, welcome to you. Give us a sense of your role. Where at Bentley Reed and there, what are you seeing when you look at the US equity market? Sure. Thanks very much Paul O'Neill, I'm the CIO at Bentley Reed. We are a traditional high net worth wealth manager with a decent family office component to it. So we do the traditional kind of risk profiling and typical mandates, I guess your income balance growth and then a mix of those kind of things. In terms of what we're seeing in the US, I guess we would typically default to passive allocations unless there is very good reason to believe that active managers can add value and justify the additional fees and maybe some of the liquidity risks that you might have there. From our perspective, when we take a step back, it appears to us that clearly the US. And elsewhere, but particularly the US, has been shrugging off any of the risks, whether interest rate risk or inflation risk or geopolitical risk as well. And certain areas of the market, particularly tech, have arguably become overextended. Mark, welcome to you again. A lot to unpack there, but give us a sense for your strategy there. You have a Smid focus, right? I do. So Mark Sherlock, Head of US Secretaries at Federated Hermes, which is an $800 billion asset manager covering cash, private markets and public markets. As you say that our principal strategy here is the US mid strategy. So looking at companies in that small to mid cap range, maybe about a billion dollars at the low end to about $15 billion at the high end and to Paul's. Point I'm here to convince him, along with Fran, that there there is life left in active management in the US yet. Right. Well, from an excellent segue to you there, thank you very much for joining us down the line. Give us a sense for your role there at Aberdeen and yeah, to marks .2, the the role of active management in the US sector. Yeah, I think we have a unique niche, it's become a niche dividend investing in the US and you know what we look for is very much a sort of a best ideas of of high quality companies with strong balance sheets to pay progressive dividends and and and can be bought at fair prices because the market is is a bit overextended at least optically with the S&P trading on 21/22 times forward earnings. And Paul, just from from your side, do you have any initial questions just for the managers before we jump into more of the the meat that discussion? I guess I'd I'd ask what you see the biggest challenges are in the Schmid space, I mean given that the US is. The most efficient geography in the market and the information is most freely available. Therefore it's very, very difficult to from my perspective to generate the real alpha over time and arguably the statistics show that. So how do you go about proving me wrong? Sure. So I think the, I think the key differential for SMID over large cap is exactly you know the the, the, the issue that you highlight in terms of. What we were class classified as sort of information inefficiency. So really what I mean by that is there are let's say 50 analysts covering Apple. What could I add to that debate that's more of a challenge actually. In our world often there are three to five sell side analysts covering a particular stock. In some cases there's no sell side coverage at all. So the opportunity for us to add alpha is, is greater than perhaps what is a hotly contested larger cap space and indeed we've. We've, we've we've we've been able to do that. So I think the the lack of coverage, the breadth also of the market. So our index is something called the Russell 2500 as that name suggests there are two and a half thousand stocks as distinct from the S&P 500. So there's just a lot of stocks out there with multiple different business models, multiple different drivers And really you know the challenge for us therefore is, is is to identify those stocks we feel we can outperform owning and. And you know we we've, we've had some success at that. So it is a challenging market but my bull case would be it is the absolute meeting point of sort of. A great opportunity to buy growth assets but equally within a an environment that of compliance environment if you like that is that is strong. So you've got the US regulatory framework as a reassurance relative to other geographies in the world and yet you have the ability to to buy these companies, it's mid companies that can grow that can triple, quadruple and beyond and you could own them over that that that period and clearly you know hope to deliver good risk adjusted returns for clients. Sure. From just a a question for you, When you're looking at those dividend payers, I guess traditionally with a low interest rate environment, dividend payers are seen as the one that really weren't growing. But now in this new environment, dividend payers are ones that are allocating capital more effectively. You could argue, yeah, no, I think we would agree with that sentiment. Although I would, I would step back and say not all companies that pay dividends are always allocating capital sensibly. And that's our job as fund managers is to find those companies with with good quality management teams, good business models. That really focus their capital allocation properly focus on those those 234 projects that have high returns, you know lower risk and then you know if they have surplus funds because they tend to be very cash generative with strong balance sheets, return those to shareholders and and and sort of keep it simple and not try to overcomplicate things, not try to look at at a half a dozen, a dozen different projects and stretch themselves thin, just be a very focused company focus on your strategic advantage and then with any surplus funds return those as dividends. And those are the companies you know, we like to invest in and and we create sort of the best ideas portfolio by doing so umm, let's also take a bit of a step out and you've got a great view from the ground there in the US What's the mood like is the economic data is looking fairly strong, but the Feds got a very difficult job now of how they play this, whether it's a hard or a soft landing or no landing, what's the view they're like? What's the sentiment like? I think the view is is the old phrase cautiously optimistic. I think people you know the the data is is is strong and employment which is sort of the the big bellwether that consumers, you know roughly 70% of GDP with unemployment rates at 3.8%. So we would call that full employment. You know sort of on the ground in the streets at restaurants. People are generally bullish. I think you know investors are obviously a bit wary, multiples are a bit stretched in certain parts of the market. That all parts of the market and I think the Fed, I think the Fed had a wish they would wish this wasn't an election year so they could do their job truly data dependent and not have to worry about sort of an overhanging the election. And they may speak to that saying that they are truly independent, but their job is made a little bit more difficult you know with an election year and obviously a highly contested 1. Mark, in the SMID space, is it a bit of an old feature that they're very, very sensitive to rate rises? Maybe that is the case here in the UK, but the US small cap space is a lot bigger. Is it less sensitive to these rate changes? Are you keeping an eye on what the Fed are doing? Certainly keeping an eye on what the Fed are doing in terms of our space. It is in aggregate more sensitive to interest rates, but within that there's pockets that are more and less sensitive. So the, you know, certain parts of the market that are, you know, cash consumptive rather than cash generative. I think Med tech, biotech, you know that they're much more sensitive to to rates. So there is a spread and and actually the portfolio we run is, is is you know under levered relative to the market. So hopefully we'll be less of a less of an issue for us, but I don't know friends experiences but certainly ours is that you know we should remember that a lot of these small caps, this is the recession that there's been, there's been an expectation of recession that's never come so far at least and and these small and midcap companies read all the same newspapers that we do and they've been preparing for this. So in terms of your question about about rates, a lot of the. Letters turned out over over multi years, you know sensible precautions have been taken you know in, in, in, in, in, in in the event of an economic downturn in terms of reducing stock levels, cutting costs and so on. So I feel that the the, the companies in our portfolio in particular are in pretty good shape to weather a sort of higher for longer environment and similar perhaps to to to France strategy, you know are the focus of our portfolio is, is, is very much the quality factor is what shines through so. And you know if you have companies with a durable competitive advantage that a cash generative and that's a pretty good starting place. You know if rates are higher for longer and particularly given much of their competition will be that more peripheral, more highly levered mom and pop type competition who may struggle under the scenario you suggest. Paul bringing a few of those points in there is good, cautious is really the watch word here and when you're looking at the US market economy is looking strong but it is an election. Yeah. There's a lot of uncertainty. There's recession that hasn't hit yet, but perhaps could. Does it really change how you look at your US allocation? Not at the headline level. I think it might do it. The underlying fund manager level, I guess cautiously optimistic. I think we would expect a great deal more volatility than we've had certainly over the last six months in the equity markets where they've just shrugged everything off. I really like the kind of positive outlook and answer from Mark in terms of the rate. The debt refinancing that's already taken place and the caution that some of these companies in the area have already shown, I would imagine that's true because one of the risks that we see is that we've had this real big boost to kind of consumer cash levels and it's worn all the way down. It's not quite there yet, but when you look at the savings rate, it's pretty much as close to the lowest rate that there's ever been and employments been good, but arguably might be about to turn down. It would be the exception rather than the norm. For there not to be a recession and for the Fed to actually engineer this soft landing that everybody almost needs right now to support the market. So I mean that gives me some comfort. And I guess you also made the point, what's attractive about the US for Smith is that once you get your business model correct, the growth opportunities are there for many years to come. In contrast to the UK where if you're a Clinton Cards or a Domino's Pizza, you've got 10 years, but if you're a Pier One Imports in the US, you've probably got 25 years of growth. Interesting. Well I think and just picking up on that point that you make, I think you know in in in in terms of the sort of recession scenario. The other the other important very important point to make in terms of in terms of Smid is this significant valuation differential that Smid trades on relative to large cap currently. So historically if you look over multi years with the data you know Smid would trade on a 10% premium to to large cap because of those that that it was structurally higher growth basically and and and a combination of the very strong performance of mega cap tech there's sort of magnificent. Even and so on or increasingly less Magnificent 7 and concerns about the future of the US economy mean that Smiths now training on a 25% discount. So again in terms of entry point risk reward to us it seems certainly relative to large cap as a whole. You know that SNID already factors in a reasonable level of caution with regards to the the economic outlook, sure, I guess that level of caution too. We've got earnings season coming up and I know that. In the two of your portfolios, you're not exposed to those big mag 7 anyway, but I guess the earnings of those does knock the confidence of maybe the wider U.S. equity market. Will you be watching those keenly? Yes, absolutely. And I think if you know UPS came out relatively recently and and you know that the data there was was was was strong, which suggests that the overlying and underlying economy is reasonably robust. I think the point you make there is a really interesting one as the year progresses. It's in France view because I think it would support his portfolio of stocks. Do that really that that you know the the earnings leadership changes because the mega cap tech stocks really have some very difficult comps as the year progresses. And really that feeds through to our hope and expectation that there will be a broadening out of those stocks that that that that that perform as the year progresses really based on the relative earnings momentum shifting away from those tech stocks which have tough comps towards a broader group of stocks that have much easier. Pumps including, I would imagine perhaps some of the dividend stocks. Can I can I just ask on Yeah, sorry to jump in, but. You're right on the comps. And I'm just thinking about the valuation differential. I think I read recently if you strip the mag 6, mag 7, mag 4, fab 4, whatever you wanna call it. Out of Q4, that earnings in the US actually fell. And I think it was a double digit for sort of 11%, something like that. And I guess that would explain the differential and therefore the easy comps as well. But wouldn't that give you some cause for concern given that we've had a very buoyant economy already?