US fund manager says Buy American

Pioneer Investments explains to distributors what looks attractive in the US markets.

Pioneer Investments, a venerable mutual fund company in the United States but a new name in Asia, is doing the rounds among its distributors here as it tries to establish a presence and is pointing out that not all investments in the US are struggling.

"There's a lot of talk about the US markets being overvalued and not going anywhere," says Boston-based David Joy, senior vice president and director of global investment communications. "It is true, the broad averages aren't doing great, but there are opportunities in value-style investments, particularly in small- and mid-cap equities as well as in high-yield bonds."

Pioneer has distribution arrangements with Prudential Securities (US) and Merrill Lynch, and Joy is doing the rounds to both hear what product the brokers want and to explain which Pioneer funds are best suited to the current environment.

The brokers are peppering him with questions about his view on US corporate earnings. Joy's take on events: earnings will show signs of recovery this quarter. He believes stock indices will not budge because the big-cap companies' valuations remain stretched รป they need to grow earnings just to justify their current stock NAVs. But more is happening at smaller (non-tech) firms that avoided Nasdaq-bubble excesses.

Moreover, Joy does not see America's massive corporate and consumer debt as an obstacle to earnings growth. "Despite sluggish growth there's not been an income recession," he says. Unemployment has risen to 6% but historically that is considered close to natural full employment in the US. Job losses have occurred in pockets, such as manufacturing, Silicon Valley and Wall Street, but have not spread. Service industries remain robust, thanks to consumer spending. Even if your equity portfolio does not look too smart right now, you are not in that bad shape provided you've kept a job.

And the housing market has remained strong. The low-interest rate environment has prompted Americans to refinance their homes. While on the one hand this adds to consumer debt, people are also maintaining their liquidity. And with low interest rates, it is easy to service even a large debt. "The burden is on the consumer to keep spending, although their capacity to do so is an open question," Joy says.

So Pioneer is recommending investors go into small- and mid-cap stocks, particularly those paying dividends; traditionally the riskier small caps provide better returns that blue chips anyway, but that logic was lost during the roaring '90s. Pioneer also likes high-yield bonds: average default rates have soared from 4.3% to 10.7% in January but a gradually improving economy suggests those rates will now recede, so buying high yield now should allow investors to enjoy tightening spreads.