US interest rate rise will be no big deal, says Threadneedle's Sobin

At the height of the August global stockmarket crash, brought on by the so-called Great Fall of China, an exasperated and fatigued New York trader made a telling observation: "It's us against the machines."

These "machines" - for which read computers - were responsible for half the trades, he was quoted as saying. Flash crashes, rogue trades, the rigging of markets and much else have been attributed to computer programs over the years, and they were also in play during the great worldwide crash of October 1987.

But for investors with short-term money at stake, the question is: How will the machines react when the US Federal Reserve lifts interest rates off the floor? And what if this coincides with yet more negative numbers from the Middle Kingdom?

One American expert, London-based fund manager Diane Sobin - a cog in the giant US wheel that is Ameriprise - believes that whatever the machines do, the real world will not be markedly impacted.

US interest rate rise impact

Many are clamouring against the widely expected one-quarter percent increase in US rates, but Sobin suggests it will be no big deal.

"We're seeing some slack in the labour market," she says, and the current inflation rate of 0.2% "is all right by me". Even if a rise in oil prices is on the cards, "this won't move the needle".

Still, any rate rise would not be a negative for economic growth, she maintains; and when rates do rise, she has positioned her exposure to banks to benefit from improved profit margins.

Sobin, a US citizen, is responsible for US equities in the UK leg of the Ameriprise global tripod, overseeing a bag of money worth $11 billion (£7 billion). Her UK firm was once known as Threadneedle Asset Management but nowadays is Columbia Threadneedle.

Columbia is a US asset management arm of Ameriprise, a financial services and insurance combine responsible for a staggering half trillion dollars, and she has ready access to its analysts and other research matter.

Sobin, who manages a range of four retail equity funds, maintains that it is "almost an advantage" to run her US money and team from this side of the Atlantic. She cites the fact that New York opens at 2.30pm London time, and this time lag allows her to focus on matters such as research.

There is a "dynamic" between her London-based analysts and those working for her US counterpart, she says, leading to "a lot of cross-fertilisation". But Sobin, a fund management veteran of almost three decades' experience, rarely visits companies herself.

Instead, she effectively sits at the centre of a spider's web, with threads running to all points in US markets. Her aim? "The right company at the right price at the right time." Nobody could dispute this as a way of creating wealth.

Macro-economic approach

Her speciality is smaller and medium-sized companies and she is lead manager on Threadneedle American Smaller Companies, the best-performing fund of the four she is associated with. She is co-manager on the other three. She took up these posts in January 2014.

What is uniform across her funds, and indeed all those within the fund management arms of Ameriprise, is a "macroeconomic and thematic approach" - in other words, a stock-picking process focused on identifying those companies best placed to benefit from prevailing economic conditions.

In the trade it's known as "top down", as opposed to the pure stock-picker's approach of "bottom up."

Sobin believes that one US sector close to the bottom is housing. "I have a large exposure to the housing theme," she says - mostly through companies that supply items such as soft furnishings and ancillary household goods, rather than housebuilders themselves.

She also feels commercial construction is nearing the bottom of its cycle, and has some exposure to the expected upturn through Eaton Corporation, the power systems group.

"We are also starting to see a bottoming process in the energy sector," she adds. Inventories are high, but the emergence of Iranian oil onto the market will be offset by falling supply from outside OPEC.

Conversely, Sobin reckons this is no time to be buying "general industrials", because of the absence of an acceleration in global growth. Nonetheless, she says the range of opportunities facing her is "vast" and her investment processes aim to identify "companies in the steepest part of the growth curve".

Operating margins are at the centre of her process. "The question I always ask is: what is the impact on earnings from the next dollar of revenue? Operating earnings are what we really focus on," she explains.

She has no truck with those - and they are many - who argue that the prevalence of share buybacks in the US is predominantly engineered toward enhanced incentives for management with bundles of share options.

"One of the top issues we address is how a company manages its capital," she says. In a cyclical industry, such as chemicals, management must be dissuaded from investing in new capacity at the top of the cycle, and excess capital should be returned to shareholders.

Growth companies, she adds, should return more capital at times when surplus cash would be better off in shareholders' hands than used to expand for expansion's sake. Moreover, share buybacks are a way of enhancing earnings per share.

Meanwhile, of her four funds, the largest is the £1.3 billion Threadneedle American Select, the "best ideas" large-cap fund.

The top 10 holdings comprise a list of big business, including the likes of Apple, Citigroup, MasterCard, Google, Pfizer and Microsoft. Performance has been average but, as with her other funds, Sobin has held one of the reins for less than two years.

Housing theme

Several of the same corporations figure in the top 10 holdings of Threadneedle American, at £1.8 billion easily the largest of the Sobin quartet. Her housing theme is represented by Home Depot.

Along with MasterCard and Citigroup, the inclusion of JPMorgan Chase reflects her faith in financial services after the impending rise in US interest rates. Performance figures for the fund are similarly average.

Threadneedle US Equity Income, a £92 million fund, has lately performed well below its benchmark, but the £635 million Threadneedle American Smaller Companies - Sobin's main responsibility - has done much better. It is a top-quartile performer over the past three years and second quartile over one.

Her top five holdings might mean little to UK investors, but they illustrate a wide spread of interests. Pinnacle Foods, a branded packaged food outfit, has what she terms "a strong pipeline", and robust cash generation will reduce borrowings and enhance cash returns to shareholders.

BankUnited, a regional bank business, is taking market share from larger rivals and is exposed to the fast-growing economy of the south-east US. "The bank is also relatively asset-sensitive, and therefore poised to benefit from rising interest rates," she states.

ITC Holdings, an electricity transmission investment, offers double-digit earnings growth and rising margins while PerkinElmer is a diagnostic enterprise that will benefit from the Obama healthcare programme.

One "fallen darling of the market" is infrared imaging technology company FLIR Systems. It did well from the US Middle East war machines, but contracts have fallen away "with the cessation of combat operations".

However, Sobin reckons the share price fall has been overdone and takes insufficient account of opportunities available in CCTV and smartphone attachments.

And what about the August crash? Sobin points out that she has gone through three great market shakeouts in her career and is determined to just "buckle down". As for the prospect of Donald Trump becoming US president, she says: "I try not to think about it."

Diane Sobin is head of US equities at Columbia Threadneedle.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.