The general consensus has been that actively managed funds have failed to add value to their benchmark because the US market is researched so heavily.
Our data shows the average fund in the IMA North America sector has failed to outperform the S&P 500 index over one, three, five and 10 years.
Performance of sector vs index over 10yrs
Source: FE Analytics
However Davidowitz, manager of the Polen Focus Growth fund, says the lack of outperformance is because the majority of his peers are afraid to back their convictions.
"As the name suggests, there are 500 companies in the S&P 500 and in the whole US market there are about 5,000 investable stocks," he said.
"There are certainly reasons why active managers struggle to outperform the US market: one of the main aspects is that managers don’t want to take big positions in less commonly held names."
"They are afraid to stick their neck out, possibly due to the fear that they may lose their job if it doesn’t pay off."
Davidowitz says his fund does not have that problem, because the management team is given full flexibility.
"We were started by an entrepreneur, meaning we don’t have those restrictions – we come from a different way of thinking," he explained.
"We take a very bottom-up long-term view to the companies we hold, as you have to cut out short-term noise when investing in the US market. Focusing on that gives us a real advantage."
"I always say when taking a long-term view, imagine you are driving your car."
"If you were to spend the whole time looking straight down at your steering wheel, you are in a lot more danger than if you keep your head up and concentrate on what’s going on further down the road."
Polen Capital is an American investment house that was set up in the 1980s. It launched the Focus US Growth fund – an Ireland-domiciled vehicle available to UK investors – in March of this year.
Davidowitz’s fund only has 20 holdings, including £6bn company Varian Medical, which only features in one other US fund’s top-10 – Janus US All Cap Growth.
The manager said: "The key elements of our process require a company to possess a pristine balance sheet with plenty of cash and little, if any, debt."
"They must generate free cash-flow far in excess of what is required to run the business as well."
"It must have sustained a 20 per cent return on capital through a market cycle, have stable or expanding profit margins, and have a shareholder-friendly management team."
"These are tough criteria. In 25 years, Polen Capital has owned fewer than 100 companies in total," he added.
FE Alpha Manager Toby Ricketts (pictured) uses passive investments to gain UK exposure in his five crown-rated Margetts Opes Growth portfolio, with HSBC American Index and Vanguard US Equity Index both among his top-10 holdings.
However, his decision to avoid US-focused actively managed finds is not because he feels the managers are playing it too safe – he just feels UK fund management groups are not good enough.
"Maybe to a certain extent [it is about fear], but I don’t think that is wholly right," he said.
"Active managers have been underperforming for so long so some must be sticking their neck out at some point."
"There are the managers who want safety and have very index-like portfolios, but we have found that the ones that have tried something different tend to get it wrong more often than they get it right. That’s why we go down the tracker route."
"There is the consensus that US equity markets are so ultra-efficient that active managers struggle to add extra value."
"But I don’t subscribe to that. At a stock level they may well be overly researched, but by analysing different sectors, managers should be able to find some benefits."
"Maybe it won’t last forever, but UK groups have an abysmal record in the US market. Funds in this country are very good in certain areas, such as emerging markets."
"It would be nice if there was a real explanation for the underperformance, but I haven’t found one."
The best example of a US-focused manager who has consistently beaten the market and his peers is Gordon Grender.
The FE Alpha Manager's five crown-rated GAM North American Growth fund is a top-quartile performer in the IMA North America sector over one, three, five and 10 years – beating its S&P 500 benchmark over each of these periods.
It is the best-performing fund in the sector over five years, up by 99.11 per cent, nearly doubling the returns of its peers and beating the index by more than 40 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Grender runs a concentrated portfolio of 43 holdings and has a bias towards mid caps. The fund requires a minimum investment of £6,000 and has a total expense ratio of 1.57 per cent.
Richard Troue (pictured), investment analyst at Hargreaves Lansdown, is reluctant to say fear is the main reason for underperformance in the US, but says he would always choose a high-conviction manager in any large cap area of the market.
"Our research has highlighted in the US and across the broader market that a manager who holds a more concentrated bunch of stocks and backs their favourites will outperform over the longer term," he said.
"They certainly tend to outperform large cap managers who hold a more diversified portfolio."
"These funds tend to be index-huggers and will generate pedestrian returns or, after fees are detracted, can underperform."
"Obviously it is a bit different when you move down towards mid and small cap managers."
"While large cap managers who take more high-conviction plays and stray away from the benchmark may be more risky and volatile over the short-term, they tend to produce the better numbers in the long-run," he added.