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The different approaches of these two S&P 500-beating US funds

13 December 2016

Experts look at the index-beating Old Mutual North American Equity and Fidelity American Special Situations funds and analyse the different approach each takes to do so.

By Jonathan Jones,

Reporter, FE Trustnet

Debate over which investment style is best suited to investing in US stocks has continued to divide opinion among fund pickers.

Indeed, investors often question how fund managers are able to add value and extract benchmark-beating returns in the largest and most developed market economy.

Steve Lennon, investment manager at Bath-based fund platform Parmenion, said: “In a nutshell, the US is a very large, liquid and highly efficient market making it tough for active managers to consistently outperform.”

Over the past five years, the average fund in the IA North America sector has underperformed the S&P 500 by 16.97 percentage points.

Performance of S&P 500 vs IA sector average over 5yrs

 

Source: FE Analytics

Indeed, just 24 of 89 active funds with a five-year track record in the IA North America sector have outperformed the S&P 500 index over the past half-decade.

Whitechurch Securities head of research Ben Willis said: “The US has been a tricky market to beat historically because of its efficiency and the effect of currency fluctuations over time.”

“The US is the most brokered equity market and dispersion of returns are very tight – for example, the best and worst fund in a calendar year could have a difference of, say, only 10 per cent.”

With outperformance seemingly harder for US-focused active managers to produce, many investors have turned to passive vehicles to gain exposure to the market.

However, Rob Morgan pensions and investment analyst at Charles Stanley Direct, said there are some skilled active managers in the North American sector.

He added: “Fund selectors can tilt the odds more in their favour through patience, careful filtering of the available universe and avoiding ‘closet trackers’.”

“It is also easier to identify good managers who operate in distinct areas of the market such as smaller companies or value investing.”

Two funds with very different approaches to investment have managed to outperform the S&P 500 over one, three, five and 10 years, and have been ahead in each of the last four calendar years.

Below, FE Trustnet looks at the funds individually and asks the experts why they have managed to buck the trend for active management.


 

Old Mutual North American Equity

The first fund is the £1.7bn Old Mutual North American Equity, run by Amadeo Alentorn, Ian Heslop and Mike Servent.

The fund has outperformed in each calendar year since 2012 and over the past five years is 36.53 percentage points ahead of the S&P 500.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

The fund uses a systematic process using analysis of fundamental company data, while taking into account the macroeconomic environment and investor sentiment.

Morgan said: “Active stock and sector weights are fairly restrictive against the index which is likely to limit active returns.”

“In short, it looks far more like the index than a pure stock picking fund and aims to slowly add value the compounding small advantages gained through the quant process.”

However, he says the recent outperformance has been down to the fund’s process honing in on high quality growth companies.

Among the fund’s top 10 holdings include Alphabet (2.2 per cent), Amazon.com (2.1 per cent) and Apple (1.8 per cent).

Morgan adds that the fund has bought companies that have become increasingly highly prized among investors.

As well as this, he points to the team’s Analyst Sentiment signal which looks to capture analyst information not currently reflected within the share prices.

Ben Willis added: “The Old Mutual fund is backed by quant process, which screens the universe and ranks stocks accordingly, constructing a portfolio in excess of 100 positions.”

“The Old Mutual fund is style agnostic but has been a beneficiary of the quality growth bias that has been very much in vogue (until recently) for several years.”

Steve Lennon adds that this style-agnostic approach has benefited the fund over the longer term, with value investing outperforming between 2012 and 2014, while growth has outperformed over the last two years.

“One of the key reasons active managers struggle is that the US, more than most other markets, is stylistically driven,” he said.

“If you plot each of the Russell 1000 Value and Growth versus the broad Russell 1000 [index], mean reversion between the two styles can clearly be seen. The Old Mutual fund deliberately manages out style bias for this very reason.”

The fund has a clean ongoing charges figure of 1 per cent and currently yields 0.42 per cent.


 

Fidelity American Special Situations

The other fund to outperform the S&P 500 over the past four calendar years is Angel Agudo’s Fidelity American Special Situations fund.

The four crown-rated fund has a value bias, with a concentrated portfolio of 50 stocks including Verizon, Oracle and Molson Coors Brewing among its top 10 holdings.

Since the manager took over at the end of 2012, the £1.2bn fund has returned 141.39 per cent, comfortably beating the S&P 500 and the sector, as the below graph shows.

Performance of fund vs sector and benchmark under manager

 

Source: FE Analytics

Willis said: “Against the background environment mentioned, he has been very impressive as it is only this year (and the last three months really), whereby value investing has been gaining the upper hand.”

“Argudo focuses first and foremost on the price he has to pay for a business that he believes can show price recovery. His view is that the downside risk is limited because the stocks he looks are out of favour and so have been discounted by the market already.”

Morgan added: “I like the manager's contrarian style, and the performance track record is good despite style and size biases being generally against over the period he has run the fund.”

“There is a high level of differentiation from the index and its stock picking fund where the manager has demonstrated considerable talent, albeit only since 2012 when he took it over. Outperformance is essentially down to stock picking, which is certainly encouraging.”

The fund has a clean OCF of 0.95 per cent and does not pay a dividend.

While the funds may look different, Architas investment director Adrian Lowcock says there are a lot of similarities between the Old Mutual North American and Fidelity American Special Situations funds.

“Performance has been very similar between the two funds over the past four years. The focus tends to be on the large caps for both funds but with some exposure to mid-sized companies where it is easier to add value.”

“Both funds have been overweight to technology which has helped drive up performance, particularly in 2016 which is where the majority of the out performance has occurred.”

Overall, the funds’ biggest similarity has been their outperformance, with Parmenion’s Lennon adding that he is a fan of both funds.

“Both have delivered very attractive risk adjusted returns in a very difficult market to beat,” he said.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.