Active funds have struggled to beat large mainstream US indices such as the S&P 500, and in most cases investors have been better off using a passive fund. However, there are a handful of funds that beat the index at least part of the time. And in other areas of the US market, such as smaller companies, active managers are able to add value. For suggestions on passive options see the IC Top 50 ETFs. For other ways to get active exposure, see the global funds on the list, and some of the specialist funds in areas including tech and biotech, as some of these have high allocations to US equities.
NEW ENTRANT: Hermes US SMID Equity (IE00B8JBCY79)
Ms Schooling-Latter suggested expanding our North America funds section with the addition of Hermes US SMID Equity. It invests in small- and mid-cap companies domiciled in the US, or which derive a large proportion of their income from US activities.
The fund’s manager, Mark Sherlock, and his team invest in high-quality companies that they think have a durable competitive advantage. They value consistency and stable growing revenues and cash flow, because they think that over time companies with these characteristics outperform with less risk. Their investment criteria are based on company fundamentals rather than being macro-driven.
They also think that focusing on quality and cash flow generation gives a degree of downside protection and a relatively lower-risk way of accessing this asset class, and that high-quality businesses tend to preserve capital in down markets, also lowering risk.
The fund has beaten its benchmark, the Russell 2500 index, over one and five years.
“The team's lower-risk approach to an otherwise higher-risk investment area is grounded by a solid and understandable process with sensible constraints, but enough flexibility to give the Hermes US SMID Equity fund a great opportunity to excel,” say analysts at FundCalibre. “Lead manager Mark, and co-manager Michael Russell, are supported by one of the largest US small- and medium-sized company equity research teams in London.”
Artemis US Select (GB00BMMV5105)
Since its launch in 2014, Artemis US Select has achieved a rare feat that many US active funds have failed to do – beat the S&P 500 index most of the time. And in the one year that it did lag – 2016 – it still produced a strong double-digit return of 26.6 per cent.
The fund’s manager, Cormac Weldon, also has a longer record of outperformance: he previously ran the Threadneedle American (GB00B7T2FK07) and Threadneedle American Select (GB00B7HJLD86) funds, the latter for over 12 years. During that time he beat the S&P 500 and the IA North America sector average with a return of 84 per cent, against 64 per cent and 51 per cent, respectively. He has over 20 years’ experience and has invested through many market cycles.
The fund typically holds 40 to 60 stocks, including some smaller and less mature companies that Mr Weldon and his team believe have superior long-term growth potential, although the fund had over three-quarters of its assets in large-caps at the end of July.
The fund’s management team takes a flexible approach when selecting stocks, changing focus as the economic and market cycle changes, with the aim of delivering returns in different conditions. And they pay as much attention to evaluating potential financial, market and economic risks as they do to investment opportunities.
JPMorgan US Smaller Companies Investment Trust (JUSC)
JPMorgan US Smaller Companies Investment Trust has a very strong record of outperforming the Russell 2000 index of US smaller companies.
The trust’s managers aim for growth by investing in US smaller companies that have a sustainable competitive advantage, strong management teams and trade at a discount to what they consider is their intrinsic value.
“JPMorgan US Smaller Companies is an attractive way to access a portfolio of quality US companies with resilient franchises and growth potential,” say analysts at Numis Securities. “[The trust’s manager] Don San Jose is experienced and has a track record of consistent outperformance versus the Russell 2000 Index driven by strong stock selection, generating NAV total returns of 19.4 per cent a year compared with 15.4 per cent a year for the benchmark since taking over in November 2008.”
On 1 July, the trust introduced a tiered management fee of 90 basis points (bp) on the first £100m of gross assets, excluding any holding in JPM Liquidity Fund, and 75bp on gross assets in excess of £100m, excluding any holding in JPM Liquidity Fund. Gross assets excluding the holding in JPM Liquidity Fund totalled £198.15m as of 1 July.
Before 1 July, JPMorgan US Smaller Companies Investment Trust’s annual fee was 100bp of gross assets. The trust has an ongoing charge of 1.28 per cent, but this could now fall.
The trust has also changed how it covers its expenses. As of 1 January this year, it covers 80 per cent of its expenses with capital and 20 per cent with income. Before this, it covered 90 per cent of its expenses with capital and 10 per cent with income. The trust’s chairman said the change “is principally driven by growth in dividends from underlying portfolio companies, supported by strong cash flows".
| Fund/benchmark | 1yr total return (%) | 3yr cumulative total return (%) | 5yr cumulative total return (%) | Ongoing charge (%) |
| Artemis US Select (GB00BMMV5105) | 15.15 | 77.62 | NA | 0.87* |
| S&P 500 index | 7.64 | 44.97 | 99.20 | |
| NEW ENTRANT: Hermes US SMID Equity (IE00B8JBCY79) | 2.17 | 32.77 | 95.81 | 0.83* |
| Russell 2500 index | -1.37 | 37.59 | 87.57 | |
| IA North America sector average | 7.61 | 47.98 | 98.86 | |
| JPMorgan US Smaller Companies Investment Trust (JUSC) share price | -2.67 | 55.27 | 123.72 | 1.36** |
| Russell 2000 index | -7.42 | 33.45 | 82.31 |
| Source: FE Analytics as at 31 August 2019, *Morningstar, **AIC. |
