Is the West best for your portfolio?

By SALLY HAMILTON
Updated: 19:00 EST, 22 September 2003

BUSINESS is brisk at the Build-A-Bear workshop as American mothers crowd to pay £26 each for teddies, complete with red satin hearts, lovingly created by their children.

The scene in Bellevue, near Seattle, is repeated at more than 100 Build-A-Bear stores across the US. The chain, launched by entrepreneur Maxine Clark in 1997, now turns over more than £100m a year, and is an example of the dynamism of the US economy that continues to attract investors - and enrich them.

UK fund companies are busy trying to convince private investors that the US is emerging from its downturn and now offers the potential for share price growth. Recent performance suggests that things are improving for the US stock market - up by 25% since last October.

Bill Fries is managing director of Thornburg Investment. The US-based fund manager runs the American Fund for the British-based Investec. He says: 'There is growing evidence that the US is in recovery. Economists are saying fourth-quarter growth will be running at 3.5 to 4.5%.'

Fries points to a rebound in confidence after the fall of Saddam Hussein in Iraq, combined with a good 'back to school' season with consumers spending hard on clothes and computers. Companies also seem to be reequipping after a three-year spending squeeze.

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'The fund did quite well even during 2001 and 2002,' he says. David, a retired administration manager from York, who is married to Jacqueline, 68, says: 'I took out the fund to balance my portfolio, which was mainly in UK, Europe and South East Asia.

'I chose it because I liked the way the manager picked the shares and its consistent performance. I haven't been to the US, but I believe it should be part of my portfolio.'

All of his exposure to the stock market, through the range of funds he has built up over the years, is aimed at generating capital growth over the long term. It is not money he will need to get his hands on at short notice. 'I won't be touching it for many years,' he says.

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Fries' fund has a three-pronged strategy. It tries to pinpoint cheap shares that will rise and produce a profit (El Paso Energy), to hold consistent earners for dividend growth (DIY group Lowes) and target companies expected to take a dominant position in a market (internet broker E*Trade).

Frederic de Merode, portfolio strategist at Fidelity, a big player in US funds, says the 'current vibrancy' in the economy has also been influenced by recent tax rebates, which Americans have spent rather than saved, and to low interest rates. 'Another factor that has stimulated the stock market,' he says, 'is the reduction in tax on share dividends.'

But rising unemployment, plus the dearer cost of long-term borrowing, threaten to dampen the shopping spree, and UK investors might have already missed the best returns.

De Merode says: 'In the past 30 years, whenever there has been a pick-up in the world economy, it tends to start in the US. And the biggest pick-up is at the beginning. But that doesn't take away the fact that the recovery feels healthier and is affecting the majority of the market.'

In the UK, individual investors still feel cautious about the outlook for America. Karen Ritchie of adviser Finance4Women in Cambridge thinks her clients are not particularly happy about investing in the US, but she says most should consider putting at least 20% of their portfolios there. 'It is the largest stock market in the world and if you don't have any exposure, your portfolio will be out of kilter,' she says.

For cautious investors, Ritchie recommends Fidelity Wealthbuilder fund, which has a 34% exposure to the US market and 40% in the UK. 'If the US goes down, the managers can switch to other assets,' she says. For a fund with a good dividend yield, she points to Standard Life American.

For those who want a more speculative investment, Ritchie favours Govett US Opportunities.