What else?

Had you bought a passive tracker of the S&P 500 at the peak of the ‘Dot Com’ boom in March 2000, you could have held for an entire decade and seen negative total returns on your investment, whether you bought in GBP or USD.

As one of my colleagues wrote recently, it can often be hard to square pithy statements with reality. In this case, the claim that ‘time in the market beats timing the market’ looks hard to justify – was it so hard to say in 2000 that the market was overvalued and that you, as a private investor, should have stayed clear?

Looking at the US market today, you could be forgiven for thinking along similar lines. As another colleague wrote in a recent strategy piece, the rally in AI stocks bears some resemblance to the Dot Com boom two decades ago, with high valuations seemingly being driven more by hype than reality.

This is not to say that there is no merit to nascent technologies. It would be hard to argue that the internet has not massively changed our lives over the last twenty years, for example. However, it’s worth noting that three of the six major tech stocks today went public years after the Dot Com bubble burst. Another two IPO’d over a decade before the bubble started. Perhaps ChatGPT will ultimately prove to be the Netscape of the 2020s?

Some investors may disagree with us, in which case tech-focused funds such as Allianz Technology Trust (ATT) are likely to appeal. Alternatively, a core US holding like JPMorgan America (JAM) – which balances both growth and value but has still outperformed over the long-term – may also prove attractive.

For those that do believe the US is overvalued, the sad reality is that there are few places that offer the same traits that the Land of the Free does - namely large cap innovators, with attractive growth prospects. Nonetheless, just as you might look at the US and have an almost instinctive sense that it’s too pricey, there are trusts which still offer the potential for attractive returns but which are priced more attractively.

Greencoat UK Wind (UKW) is one. Like other infrastructure investments, UKW seems to have been viewed by many as a fixed-income alternative. Now that rates have gone up, it seems that investors are demanding higher yields to compensate. There are also fears about the level of debt used to make these investments and the impact rate hikes would have on that.

But as we noted in a recent article, for UKW’s dividend to come under threat, there would likely have to be a monumental crash in power prices, something few people are predicting at the moment. More importantly, the trust’s returns have not been driven solely by dividends.

As we noted in one recent article, the trust’s current discount rate implies an 11% annual return, which is reduced to 10% when you factor in fees. However, this is based on the NAV and, given the trust is trading at a c. 20% discount as at 24/10/2023, the implied return is actually 12%, accounting for management fees.

Another sector that may ultimately prove attractive is UK small caps. Although the outlook for some firms may have worsened, we noted earlier this year that similar periods of poor performance have typically been followed by strong returns.

Moreover, some managers are arguably better positioned to deal with an economic downturn. For example, BlackRock Smaller Companies (BRSC) places a strong emphasis on cash flows and balance sheets, meaning many top holdings have no debt and large amounts of cash on their balance sheets. As such, they are better able to weather an economic downturn and may arguably even benefit from it if their competitors either go out of business or can be acquired.

It's unlikely that UK small caps are likely to excite investors’ sensibilities in the same way that US tech will. The same is probably true of a renewables investor like UKW. But for investors that are still looking for attractive potential returns at more palatable valuations, they may look more appealing than the US does today.

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