Fund trends: Follow the leader

By Gary Jackson, Editor, FE

Added 22nd April 2016

A graveyard for active managers or a door to tech and healthcare opportunities? The US market remains under scrutiny from wealth managers and analysts alike.

Fund trends: Follow the leader

US equities have led the market recovery following the global financial crisis, thanks in part to the huge amounts of monetary stimulus that the US Federal Reserve unleashed to bolster the economy after the devastating events of 2008.

FE Analytics data shows that the S&P 500 made a total return of just more than 198% between bottoming out in March 2009 and the end of February 2016 as unlimited quantitative easing and historically low interest rates helped to steady investor sentiment.

While the FTSE 250 has risen further (it gained more than 230% over the period in question), other major indices have been left in the S&P’s dust: the MSCI World’s total return was 144%, STOXX Europe 600’s 116%, the FTSE 100’s 105%, the Nikkei 225’s 88% and the MSCI Emerging Markets’ 79%.

But the US stock market has a reputation for being a difficult hunting ground for active managers, given it is the world’s most heavily researched by brokers and is swayed by large movements in passive funds.

The data backs up this view. While the S&P 500 posted an 83% total return in the five years to the end of February 2016, the average member of the IA North America sector made just 67%.

In contrast, the average fund in the IA UK All Companies sector beat the FTSE All Share over the same period after returning 35%. The index was up 28% during this time.

Active concern

Over the past five years, 18 IA North America funds – or 19% of the sector’s 93 members – outperformed the S&P 500. In the IA UK All Companies peer group, 61% of its 242 funds have made more than the FTSE All Share. But these numbers do not mean that all the members of the sector have failed to justify their active fees over recent years – or have had to focus solely on the big technology names commonly associated with US equity investing.

In total, 13 active funds in the IA North America sector outperformed the S&P 500 over both three- and five-year periods. Admittedly, the leader (by a clear margin) is a specialist fund, JB Multistock Health Innovation, which made 228% over the five years to the end of February 2016.

As its name suggests, the fund specialises on investments in the healthcare sectors, including areas such as pharmaceuticals, biotechnology, managed healthcare, healthcare equipment and drug retail. It counts the likes of Allergan, Johnson & Johnson, Gilead Science, UnitedHealth Group and Pfizer as top holdings.

However, this is not the only US fund that has benefited from exposure to healthcare as a number of the sector’s outperformers of recent years have significant weightings in this part of the market.

Andrew Acheson and Paul Cloonan’s Pioneer Sicav US Fundamental Growth is the ‘conventional’ US equity fund to have made the highest return over the past five years, gaining 104% against the S&P 500’s 83%. The fund’s strategy is to invest in US large-caps that the managers think offer superior free cashflow growth.

At the right price

While the fund has a growth investment style, ensuring the right price is paid for an asset is a cornerstone of the process.

The managers say: “The pursuit of under-priced stocks has as much validity in growth investing as it does in value investing. That is why we are careful to select stocks with strong free cashflow growth that we believe has not yet been reflected in their price.”

Pioneer Sicav US Fundamental Growth has a concentrated portfolio that currently numbers just 38 holdings, with 42% of assets being in its top 10 positions. Alphabet – the parent company of Google – is the largest holding at 4.4%, followed by Apple, Microsoft, Mastercard and Home Depot.

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