US smaller companies funds have outperformed their large-cap peers over the past five years despite having no exposure to the high-growth tech stocks that have driven the S&P 500, according to data from FE Trustnet. 
The IA North American Smaller Companies sector came out as the second best regional small-cap sector overall in FE Trustnet’s recent study on where small-caps have added the most to an investor’s portfolio over the past five years.
Yet, it is somewhat surprising that US smaller companies funds have outperformed their large-cap peers over five years, returning 135.06 per cent.
Performance of sectors over 5yrs
Source: FE Analytics
Led by the success of the FANG stocks (Facebook, Amazon.com, Netflix and Google), the IA North America sector has performed exceptionally well, returning 126.57 per cent.
However, both the IA North America and IA North American Smaller Companies funds lag the benchmark S&P 500 and Russell 2000 indices on average, which have returned 144.78 per cent and 143.74 per cent respectively over the last half-decade.
Over a one-year period the IA North American Smaller Companies sector has returned exactly five percentage points more than the large-cap sector.
Adrian Lowcock, investment director at Architas, said: “The sector has performed well recently on the expectation that president Trump would introduce significant tax cuts which would benefit US smaller companies the most.”
Having previously looked at the UK and Japanese smaller companies sectors, FE Trustnet lifts the bonnet on the nine funds with at least a five-year track record in the below article.
Only three funds in the IA North American Smaller Companies sector have outperformed the Russell 2000 index over the last five years.
The US market is notoriously difficult for fund managers to outperform in as the rise of passives and efficient nature of the market – both at the larger and smaller end of the market – make it difficult to provide an edge.
However, Threadneedle American Smaller Companies has proven to be a consistent performer, outperforming over three, five and 10 years, and is the best performer over the last half-decade.
The £818m fund is run by Diane Sobin and Nicolas Janvier and is benchmarked against the S&P Midcap 400, meaning it is based slightly higher up the market cap spectrum than some of its peers.
The fund, which is slightly overweight technology and industrials while underweight financials and materials, has returned 158.37 per cent over the last five years.
Threadneedle American Smaller Companies invests at least two-thirds of its assets in US smaller companies typically with a market value of $500m to $10bn at the time of purchase.
The three crown-rated fund has a clean ongoing charges figure (OCF) of 0.87 per cent.
Source: FE Analytics
Just 21 basis points behind the Threadneedle fund based on five-year performance is T. Rowe Price US Smaller Companies Equity.
The four crown-rated fund has been managed by Ryan Burgess since October 2016 and has also been managed by Frank Alonso (2013-2016) and John David Wagner (2008-2013) over the period in question.
The fund, which is benchmarked against the Russell 2500, is overweight technology as well as consumer staples and utilities and is underweight energy, financials and real estate.
Expanding the timeframe to 10 years, the $1.1bn fund is the top performer, returning 262.21 per cent, 15.24 percentage points ahead of the Threadneedle American Smaller Companies fund.
T. Rowe Price US Smaller Companies Equity has an OCF of 1.12 per cent.
The only other fund to outperform the Russell 2000 over the last five years is Schroder US Smaller Companies. It is also the only fund in the sector run by an FE Alpha Manager - Jenny Jones.
At least 80 per cent of the fund must be invested in companies in the bottom 20 per cent by market capitalisation of the North American market.
The fund has returned 149.16 per cent over the period and has a more cautious approach than some. It focuses on three types of companies: those that demonstrate strong growth trends and improving levels of cash; companies which generate dependable earnings and revenues; and, companies that are undergoing positive change that is not being recognised by the market.
The fund is underweight technology (unlike its peers above), as well as financials and is overweight consumer discretionary and energy. It has an OCF of 0.92 per cent.
At the other end of the spectrum, Legg Mason IF Royce US Smaller Companies is the laggard in the sector, failing to make triple-digit returns over the last five years.
The £218m fund is run by Lauren Romeo who focuses on a value-driven approach, a style that has underperformed in the US as growth has outperformed.
The fund, which is benchmarked against the Russell 2000, is aimed to protect against downside risk, investing in companies with the ability to reduce balance sheet risk. It has an OCF of 0.98 per cent.
Not in the above list but also worth noting is the only five crown-rated fund in the sector – Hermes US SMID Equity.
Performance of fund vs sector and Russell 2000 since launch
Source: FE Analytics
Since its launch in October 2012, the fund has beaten the sector average and the Russell 2000 index by 19.63 and 15.11 percentage points respectively.
The $991m fund, run by Mark Sherlock and Michael Russell, is benchmarked against the Russell 2500 and can invest in both small- and mid-caps.
Sherlock became lead manager on the fund when Robert Anstey left the firm in October 2013 having previously managing Hermes UK Focus.
Domiciled in Ireland, the fund has 58 holdings, with the 10 largest accounting for 23.06 per cent of the overall portfolio. It has an OCF of 0.87 per cent.