Plan around U.S. policy uncertainty

President Trump may be a prolific tweeter, but the pace of U.S. policy change has been slow — and that’s a challenge for portfolios.

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“There was a lot of positive sentiment post-election […] on the ability of the new administration to implement a pro-growth agenda,” says Peter Hardy, vice-president and client portfolio manager at American Century Investments in Kansas City, Missouri. Potential policy changes in healthcare, taxes and regulation informed that sentiment.

But poor results with repealing the Affordable Care Act, or Obamacare, have called into question the administration’s ability to make other changes. “That being said, the expectations are [that] tax changes will occur in the second half of this year after the budget has passed,” says Hardy, whose firm manages the Renaissance U.S. Equity Income Fund. Lawmakers have until September 30 to pass a new government spending package.

Read: What to expect from U.S. policy reform

Nonetheless, Hardy and his team are cautious on companies poised to benefit from potential changes. “Many of the companies that are high taxpayers rallied in November and the early part of [2017],” he notes. Today, their valuations remain high.

“Many of the names appear less attractive to us [because] stock prices have gone up,” he says. Further, “there’s potential risk the [tax] changes don’t go through […] as investors are anticipating.” If they do go through, it’s not certain how they’ll be funded, he adds.

To protect the portfolio, he and his team have focused on names that aren’t beneficiaries of potential tax changes from a stock price perspective,” Hardy says. That includes energy stocks, which have fallen in price due to supply-and-demand concerns; the fund has a relatively heavy weighting to these stocks. Industrials exposed to energy, like General Electric, are also part of the mix.

As of August 21, the one-year annual return of the S&P Dow Jones Indices’s Energy Select Sector Index was -12.20%, while the index’s year-to-date return was 17.86%.

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Hardy’s team also favours technology, with positions in semiconductor companies and information technology. While the integration of new technology and products makes semiconductor names attractive, they aren’t speculative or high-growth, like Facebook or Amazon. “Therefore we have a heavier weight in information technology,” says Hardy.

Whether or not U.S. tax changes occur, the team’s overall strategy is to buy high-quality businesses selling at discounts due to perceived transitory issues. Says Hardy: “Republic Services is a U.S.-based waste company, and we do have exposure there. That name would theoretically be a beneficiary of tax changes.”

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