Home / Not too late to increase US exposure – Principal

(Pictured: Jim McCaughan) 

Keeping a watchful eye on valuations, Jim McCaughan, the chief executive of Principal Global Investors, says that it is probably not too late to lift an under-weighting to the US share market. “We think the US has another two or three years to go,” he says.

On a visit to Australia last week, the veteran investor and commentator said that you only had to look at the way productivity in the US kept going up to see how flexible and adaptive the US economy was.

He said: “There is so much more productivity improvements there than, Europe say. The US has good demographics because of immigration and is very competitive, which keeps productivity going up.”

Europe, on the other hand, would likely see further damage from Spain if it follows the Greek crisis and would be a lot worse because of its greater importance. Japan, too, showed lots of good intentions “but it’s fiscal policy doesn’t make sense – why did they raise their GST?… If you look around the world, you can’t see why not to invest in the US.”

McCaughan believes that the US dollar has not yet gone so high as to hurt US exporters. “Actually that’s what might end it all,” he says. “But with productivity growth and cheap oil I think they can work their way through it.”

He is a little more bearish on the medium-term outlook for China than most commentators. “I think they are going down further because of the credit cycle. There is a lot of borrowing in China now and that’s classically a time that things turn down,” he says. “My non-consensus call on Chinese growth is that it will be about 5 per cent [rather than 6.5-7.0 per cent] within a year or so.”

Principal operates a multi-boutique model for most of the asset classes it invests in, including some hedge funds. McCaughan says the firm currently likes real estate, especially unlisted, with US commercial real estate offering a good yield and global real estate having done well in a low-interest-rate environment. Principal last year did a deal with AustralianSuper on direct overseas property, with the US manager to advise on US commercial real estate worth US$200 million or more.

McCaughan says that while many investment managers have been through a tough time since the GFC, the multi-boutique style serves well because of tis broader range of capabilities.

“There are a lot of clients going passive and looking at LDI [liability directed investing]. But we don’t mind because we are a natural satellite [for a core-plus-satellite strategy]. We have clients now in more than 70 countries, which is up from 60 a year or so ago.”