Since taking over the Cambridge U.S. Dividend Fund at the end of 2013, we have been pleased by the level of acceptance from many Cambridge supporters. We did however receive feedback from some clients looking for pure USD exposure as the product had the ability to hedge currency. We listened and are pleased to offer Cambridge U.S. Dividend US$ Fund. This new option allows clients to purchase the mandate in U.S. dollars with no currency hedging (all holdings are held in USD).
You now have a choice of:
NAV Currency Hedging Allowed
USD No ** NEW **
While over time we do believe there is further downside risk to the Canadian dollar versus the U.S. dollar, following the recent rapid decline, the easy money is likely behind us. That being said, we believe this new pure USD version will help investors looking to better manage their geographic/currency asset allocation mix while having direct exposure to the USD – giving clients more options.
While sentiment and valuations can swing both positively and negatively, over the long term, the U.S. economy, market, and dollar have an important role to play in a well-diversified portfolio. Here are a few interesting facts to consider about the U.S. market when deciding how to allocate capital, particularly from a Canadian’s perspective:
Market Quality, Size and Breadth
- While it is well known that the U.S. market is much larger than Canada’s (approximately 40% of global market cap for the U.S. compared to under 4% for Canada), did you know Texas alone (excluding energy) has more companies over $1.0B in size with Return on Invested Capital (ROIC) over 10% than all of Canada?*
- In the U.S., energy and the five largest banks make up roughly 15% of the market. In Canada this is over 40% - not exactly well diversified.
Capitalism and Rule of Law
- As Canadians, we sometimes take for granted key principles which significantly reduce risk, including a well-functioning judicial system, low corruption and property rights. While neither Canada nor the U.S. is perfect, investing in other markets globally often carries far higher levels of risk.
- The U.S. represents well over half of the market capitalization of the top 20 least corrupt countries, as defined by the World Bank. Owning U.S. companies can provide access to global growth while still offering U.S. legal safeguards.
- From a Canadian investor’s perspective, the USD can act as a nice shock absorber during volatile times. In periods where the volatility index (VIX) has spiked, the U.S. dollar had tended to appreciate against the Canadian dollar, helping to mitigate downside risk for a Canadian investor’s portfolio.
The U.S. is home to a large number of high-quality businesses that we at Cambridge view as “core” holdings (many of which are owned in the Cambridge U.S. Dividend Fund). Over time we believe these high-quality businesses will be able to compound value for shareholders through continued strong operational execution and intelligent capital allocation. While there will always be those who question the U.S., the power of capitalism has proven them wrong time and time again. Warren Buffett said it best in his most recent Berkshire Hathaway annual letter (page 7):
“Indeed, who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita U.S. output has sextupled. My parents could not have dreamed in 1930 of the world their son would see. Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).
The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.”
* 5 year average Return on Invested Capital per Bloomberg