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 (for suggestions on passive options see the IC Top 50 ETFs, last published on 12 June 2020).
However, there are a handful of funds that beat the index at least part of the time. And with US indices arguably expensive and the potential for market falls due to the coronavirus pandemic, passive funds may not continue to do as well against active funds, which might be better at mitigating steep market falls.
There are also areas of the US market, such as smaller companies, where active managers are able to add value.
Other ways to get active exposure to US equities include some global funds, and specialist funds in areas including tech and biotech, as some of these have high allocations to US equities.
NEW ENTRANT: LF Miton US Opportunities (GB00B8278F56)
Hugh Grieves and Nick Ford, managers of LF Miton US Opportunities, don’t just invest in companies in the S&P 500 index but look for holdings across the larger Russell 3000 index, which accounts for 98 per cent of the US stock market. This means that the fund has relatively lower exposure to the larger constituents of the S&P 500 than some active and passive US funds, making it a good diversifier.
LF Miton US Opportunities’ managers pay close attention to the fundamental merits of potential investments, and favour businesses that have a good level of return on cash invested. They also like them to have sustainable franchises, deep economic moats, ways to grow profits by fending off competition and the ability to profitably reinvest their proceeds. They don’t pay what they consider to be a high price for quality, but rather wait for a company they like the look of to reach a valuation that looks attractive before they invest in it.
The fund is relatively concentrated with, typically, 35 to 45 holdings.
Mr Grieves and Mr Ford aim to beat the S&P 500 over a cycle and have been successful in their aim. The fund is ahead of this index and the Investment Association (IA) North America sector average over one, three and five years, as of end of July. But the fund’s investment universe is wider than the S&P 500 and it can at times lag this index and more conventional US equity funds in times of rising markets, such as in 2019.
“LF Miton US Opportunities fund has an excellent, well-defined process, while its managers also have the flexibility and pragmatism to adjust the portfolio to different market environments,” comment analysts at FundCalibre. “We like that it invests in more medium-sized companies, and the emphasis on capital-light, high-return-on-capital businesses is a good way to invest. This is one of the strongest funds available in the IA North America sector.”
The fund’s managers are also experienced: Mr Ford has 30 years and Mr Grieves has 24 years of industry experience. They have run the fund since launch in 2013.
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 – beaten the S&P 500 index most of the time. And in the one year that it lagged – 2016 – it still produced a strong double-digit return of 26.6 per cent, not far behind the index’s return of 30.6 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.
Mr Weldon says that part of the reason for his success against the index is paying a lot of attention to downside risk, and investing in stocks where he and his team think the upside greatly outweighs this. They also take a pragmatic approach, changing their focus as the economic and market cycle changes. So, for example, if growth stocks are doing well they invest in them and if there is an opportunity for value to outperform they aim to hold those types of stocks.
SRI OPTION: Federated Hermes US SMID Equity (IE00B8JBCY79)
Federated Hermes US SMID Equity invests in small- and mid-cap companies domiciled in the US, or that derive a large proportion of their income from US activities. The fund’s lead 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 is a relatively lower-risk way of accessing this asset class. They believe that high-quality businesses tend to preserve capital in down markets, lowering risk.
They have a watchlist of about 200 companies that meet their quality criteria, which has been built up over the past 10 years and supports timely investment when valuations are appropriate. They produce a detailed company report and cash flow model for each potential investment.
The fund’s cumulative performance numbers did not look good relative to the Russell 2500 index and the IA North American Smaller Companies sector average at the end of July. However, this is due to underperformance so far this year, and in 2017 and 2018. The fund has outperformed these benchmarks in other years, so we are leaving it on the list for now.
JPMorgan US Smaller Companies Investment Trust’s management team aims to invest in well-run US smaller companies with attractive and sustainable profits. They like them to have sustainable competitive advantages and a record of success, and to be good stewards of capital. The managers look to invest in companies they think are trading at a discount to their intrinsic value with strong management teams.
This investment approach has resulted in a very strong record of outperformance. The trust’s NAV returns have beaten the Russell 2000 index of US smaller companies in 10 out of the past 10 calendar years and over the first seven months of this year.
“JPMorgan US Smaller Companies Investment Trust is an attractive way to access a portfolio of quality US companies with resilient franchises and growth potential, which have typically led to outperformance in tough markets,” comment analysts at Numis Securities. “The trust is guided by an experienced management team, led by Don San Jose, head of the JPM US small-cap active core strategy team in New York. This team has a record of consistent outperformance versus the Russell 2000 Index through a stockpicking approach focused on quality growth companies trading at reasonable valuations. Over the past five years, the fund has delivered a NAV total return of 305 per cent, or 15 per cent a year, compared with 247 per cent or 13.2 per cent a year for the Russell 2000 index.”
The trust’s managers have maintained their investment approach since the onset of the coronavirus pandemic. But they have taken advantage of market volatility to buy companies they like on lower valuations and added 14 new positions over the first six months of this year. “Most of these new positions are companies that we have long admired, but had not bought due to elevated valuations and market capitalisation constraints,” explains Mr San Jose. “We want to position the portfolio for the long term and have exposure to companies that can withstand the duration of this pandemic and emerge stronger once it’s over. Similar to the previous year, our main allocations are in the financial services, producer durables and consumer discretionary sectors, which make up close to 60 per cent of the overall allocation. Through the volatility, we continue to increase our exposure to quality, focus on high conviction stocks and take advantage of market dislocations for compelling stock selection opportunities.”
|Fund/benchmark||1-year total return (%)||3-year cumulative total return (%)||5-year cumulative total return (%)||Ongoing charge plus any performance fee (%)||Morningstar Sustainability Rating|
|Artemis US Select||7.0||55.0||132.7||0.85||Average|
|LF Miton US Opportunities||10.6||42.8||113.9||0.90||Above Average|
|S&P 500 index||10.9||44.5||125.7|
|Federated Hermes US Smid Equity||(7.4)||13.1||64.0||0.84||Below Average|
|Russell Mid Cap||(1.1)||24.0||83.0|
|JPMorgan US Smaller Companies Investment Trust share price||(3.1)||19.6||86.1||1.23*|
|Russell 2000 index||(3.6)||11.5||66.1|
Source: Morningstar, *AIC.
Performance data as at 31 August 2020.
**Data shown is for a different share class to the one indicated in the text
For all our selections across various sectors, see below: