There are some giant brands available on the US markets but owning these can be expensive. This is where US equity funds can be useful.
It has long been accepted wisdom that it is difficult for active fund managers to outperform the US stock market. When looking at the performance record of the 109 US equity funds available on the TD Direct Investing platform, it shows just 19 of them managed to beat their benchmark over five years to the end of 2015.
The below chart and ensuing list is of four funds bucking this trend and one that might still be of interest, in contrarian terms, even though it isn’t performing as well as the other four. (See bottom of the article for each fund’s performance over five years).
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Past performance is not a reliable indicator of future results.
Source: Morningstar Direct as at 30 April 2016. All returns in GBP.
The Risk Return Profile chart for the US equity funds on our Recommended Funds list above allows you to compare a fund’s return against its level of risk (standard deviation) against loss. The diagonal arrow running from the lower left-hand corner to the upper right-hand corner divides the profiles into those in which the return is high relative to the risk of loss from those in which the risk of loss is high relative to the return.
Funds to the left and above the diagonal line may be considered to have performed well and those to the right and below the diagonal line may be considered as having some work to do, or represent contrarian opportunities.
We spoke to members of each of the funds’ teams listed below to get an idea of their strategy and where they are looking at the moment.
Old Mutual North American Equity
Ian Heslop, manager of Old Mutual North American Equity, is not wedded to a particular investment style. This allows him to adopt a more market sensitive approach, shifting the portfolio depending on the market environment, which is often driven by sentiment. This flexible approach to investing means he is not constrained into certain types of stocks. Last year the fund had a growth tilt; today he is looking at value versus quality. It also leads to the fund being genuinely uncorrelated with other US equity funds.
JPM US Equity Income, managed by Clare Hart, has a focus on companies’ earnings over a minimum five-year period. Her preference is for companies with a low pay-out ratio (the fraction of net income a company pays to its shareholders in dividends), leaving enough earnings that they can reinvest in the business.
Since the financial crisis in 2008 Hart has been rebuilding her position in financials, which she believes will benefit from a rising interest rate environment, mainly through retail banks. She also likes insurers within that sector. Energy is another sector overweight in the portfolio, with Hart favouring integrated oil companies which have been able to navigate volatile markets.
Schroder US Mid Cap manager Jenny Jones seeks out companies with one of three attributes: mispriced growth, ‘steady eddies’ and turnarounds. Steady eddies, companies with stable growth characteristics and strong free cash flow, are currently presenting the most opportunities. Like Hart, Jones has been building exposure to financials this year in case the Federal Reserve (Fed) raises interest rates earlier than expected. Around half of the financials weighting is in regional banks, with other positions in financial data systems companies, like electronic payments processors.
Jones also likes some consumer discretionary companies with a strong competitive position, such as department stores, that have adapted their business model effectively to respond to the threat from online retailers.
Legg Mason Clearbridge US Aggressive Growth
Evan Bauman, manager of Legg Mason Clearbridge US Aggressive Growth, has a strong focus on disruptive growth. Around one third of the portfolio is in the healthcare sector, with Bauman favouring biotechnology companies. Bauman likes to own companies with innovative treatments and valuable assets which are able to grow organically. He holds some large, well-capitalised stocks. He also believes the sector will benefit from merger & acquisition (M&A) activity this year.
Another area where disruptive growth is taking hold is cable and media, where after strong performance in recent years the industry is affected by “cord cutting” – the trend of viewers cancelling expensive TV subscriptions in favour of cheaper options such as streaming. The focus for Bauman is on content producers. The fund has owned Comcast since the late 1980s, from its days as a regional cable company to the media conglomerate it is today.
One to watch in the future
As we mentioned earlier, there are some funds that aren’t performing as well but could represent a contrarian opportunity.
Legg Mason Royce US Smaller Companies has struggled over the last few years as fund manager Lauren Romeo’s value style has been out of favour. However the fund has a disciplined, repeatable process and could represent a very interesting contrarian opportunity. Romeo believes the small cap space has better growth prospects than the S&P 500 index going forward, and valuations have come down severely on some cyclical areas such as durable goods, electronics manufacturers and energy. These also tend to be higher quality than the overall index.
When we spoke to her Romeo highlighted three stocks which fit into the fund’s criteria. Saia provides small freight transport services throughout the US. It was hard hit in 2015 along with the rest of the trucking industry, but has the potential to gain market share in a new regulatory environment.
John Bean Technologies, which manufactures and services food processing and airport transportation equipment, has strengthened its management team and avoided the issues faced by many industrial companies.
Genworth Canada, a residential mortgage insurer, was hit by falling energy prices and concerns about mortgage losses in energy-dominated Western Canada. Romeo feels this was unjustified and remains confident about the company’s long-term prospects.
If you’re keen to invest in US equities, you can find out more about how to do so on our US and International Trading page.
Image may be NSFW.
Clik here to view.
Past performance is not a reliable indicator of future results.
Source: Morningstar Direct as at 30 April 2016. All returns in GBP.
The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.
We may receive two elements of commission in relation to international dealing – Trading Commission and our FX Charge.
Remember that each fund is unique and hence exposed to different levels of risk. Some are relatively low risk, whilst others can be very risky and those will only be appropriate for more sophisticated investors.
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