Where to get the best US returns

The US has been a notoriously difficult market for active managers and it has once again emerged as the market with the highest ratio of underperforming funds, according to new data from Tilney Bestinvest.

The report highlights 'dog funds' that have underperformed their benchmark over three consecutive 12-month periods by 10 per cent or more over the entire period of analysis. It pinpoints North American equities as the area with the highest number of dogs as a proportion of the whole group. It says: "Ten dog funds in the kennel represent 18 per cent of the sector universe."

Of all the funds on Tilney's list of North American dog funds, the worst performer on a three-year cumulative total return basis to 26 January is Legg Mason IF Royce US Smaller Companies Fund (GB0034100932), which has returned just 5.1 per cent in that time. According to Tilney Bestinvest, over three years to the end of December 2015, an investment of £100 the fund grew to just £122 by the end of December 2015 three years later compared with £168.29 for the S&P 500.

Another poor performer is GAM North American Growth (GB0002423852), which notched up positive returns of 18.8 per cent to 26 January but lagged the S&P 500 by some margin. The index returned 34.19 per cent over the same period.

The 10 US funds in the doghouse all failed to generate more than the index on a three-year return basis, calling into question the justification for their comparatively high ongoing charges when compared with index trackers.

The best S&P trackers and exchange traded funds (ETFs) on the market are cheaper and delivered far better returns. According to Trustnet data, the best-performing S&P trackers all succeeded in beating the worst active funds at a far lower cost. The cheapest S&P 500 ETF comes in at just 0.07 per cent compared with a fund such as Legg Mason IF Royce US Smaller Companies at 1.73 per cent ongoing charge.

And if you had chosen a different US index to track in a passive vehicle, the gap between poor active and good passive fund looks even larger. Of all the passive funds tracking US equities, those returning the most over three years were Amundi ETF Nasdaq 100 (ANX), which returned 75.9 per cent by tracking the MSCI USA index and iShares Nasdaq 100 UCITS ETF (CNDX), tracking the Nasdaq OMX 100. Also performing well was the UBS ETF MSCI USA Growth SF UCITS ETF (UC35), which tracks the MSCI USA Growth index, a good index to follow during recent years in which accommodative central bank policy in the US has pushed up equity markets.

However, those indices are unlikely to do well in all market conditions. The switch to a rate tightening cycle could mean something very different for the best performers over the last three years from 2016 onwards. For investors wanting a fund benchmarked against the S&P 500, there are still several active managers who have outperformed that index and beaten the returns from a passive fund. Among them are Tilney's pedigree choices - Old Mutual North American Equity (GB00B1XG9G04), and Dodge & Cox Worldwide US Stock GBP (IE00B51BJD26). Both have returned more than the S&P and Old Mutual has trounced it, generating 62.84 per cent over three years.

So the lesson when it comes to US equities? Passive delivers the best results but a small number of managers are still beating the S&P 500.

Source: FE Analytics, as at 26/01/15

Source: FE Analytics, as at 26/01/15

Source: FE Analytics, as at 26/01/15