T. Rowe Price US Large Cap Growth Equity, T. Rowe Price US Blue Chip Equity and Dodge & Cox US Stock are among some of the US equity funds to achieve the best genuinely active returns while offering the lowest ongoing charges, according to research from FE Trustnet.
This comes as part of an ongoing series, in which we look at the equity funds across various sectors which have generated the most alpha over five years while maintaining the lowest ongoing charges figures (OCFs) relative to their peers (previous articles have honed in on the UK, global equities, emerging markets, Europe and Japan).
Now though, we are looking at the funds in the IA North America sector, nearly all of which are of benchmarked against the mature and efficient US stock market. According to data from FE Analytics, only 32 out of 96 (or one-third) of funds in the sector have outperformed the S&P 500 index over five years and even fewer (19 per cent) have managed to do so over the last three.
As such, our study focusing on US equity strategies only found three candidates within the sector to have passed through our filters as being the top funds which have comfortably outperformed the benchmark through genuinely active management while offering some of the lowest charges in the sector.
As with our previous studies in the series, we initially created a list of all actively-managed US funds with at least five-year track records and, from these, generated the average alpha (which measures the over- or underperformance relative to a benchmark), information ratio (which is a risk-adjusted measure of actively-managed fund performance), five-year total return and OCF.
Having removed all of the funds that weren’t above-average across all filters, we then ‘double distilled’ the data by re-running the averages to find the very best funds available. We were left with the three funds shown in the below table:
Source: FE Analytics
First up with the lowest OCF at 0.7 per cent is Dodge & Cox US Stock, which has four FE crowns and is $665m size (its base currency is denominated in dollars. Investors should also note that it is domiciled in Ireland).
The fund also has the highest five-year alpha generation on the list of 2.81 which means that, if the S&P 500 is assumed to have a return of zero over this time frame, it would have generated an additional 2.81 per cent.
It has an information ratio over the same time frame of 0.34 which, although may seem low, is significantly higher than the negative sector average ratio of 0.2 (it is difficult for US funds to maintain a high tracking error relative to the index while also outperforming it).
Dodge & Cox US Stock is managed using a team approach and, when it comes to stock selection, it looks for companies which have been temporarily undervalued by the market but have strong long-term growth prospects. The team also considers financial strength, economic conditions, whether a company has a competitive edge and the quality of its franchise.
Examples of its largest holdings include bank and brokerage firm Charles Schwab Corporation, Bank of America and financial services company Wells Fargo; these companies account for a combined 11 per cent of the 61-stock portfolio.
Over five years, the fund has outperformed its average peer and S&P 500 benchmark by 29.56 and 17.66 percentage points respectively with a total return of 146.21 per cent. This means it is has generated the eighth-highest returns out of all funds in the sector over this time frame.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The next two funds on the list – which are from the same fund management house – have OCFs of 0.82 per cent.
One of these is T. Rowe Price US Blue Chip Equity, which has five FE crowns and has been headed up by Larry Puglia since 2003.
The Luxembourg-domiciled Sicav is $512m in size and aims to provide long-term growth through a diversified portfolio of large and medium-sized US ‘blue-chips’; examples of its largest holdings include the likes of Amazon, Alphabet and Facebook.
Despite these three aforementioned stocks accounting for a large weighting of the S&P 500 index, the fund has nevertheless achieved a five-year alpha generation of 2 (relative to its average actively-managed peer’s negative alpha of 0.5) and an information ratio of 0.36.
Manager Puglia currently has significant overweight positions in consumer discretionary and information technology stocks relative to its benchmark, as well as notable underweights in consumer staples, energy and financials. The portfolio currently consists of 124 stocks although Amazon – its largest holding – accounts for more than 9 per cent of the fund alone.
Over five years, the fund has returned 161.04 per cent compared to its sector average and S&P 500 benchmark’s respective returns of 116.65 and 128.55 per cent.
On the fund’s website, Puglia states: “We believe that the high-quality, consistent growth companies that we seek to invest in remain attractive and could continue to perform well even if the economy experiences only modest growth.
“From a positioning standpoint, we continue to emphasize companies with durable growth prospects, innovative business models, and disruptive technologies that put them on the right side of change.”
The third and final fund on the list is T. Rowe Price US Large Cap Growth Equity, which also has five FE crowns and is managed by Taymour Tamaddon. While investors should note that Tamaddon only became manager of the fund at the start of this year, he has worked at the company for a vast majority of his 13-year investment career.
Tamaddon aims to find companies that can achieve double-digit earnings growth per annum and has a relatively concentrated portfolio of 63 stocks. The fund’s top 10 accounts for approximately half of the overall portfolio, with Amazon taking the top spot as its largest individual constituent at 7.72 per cent.
On the T. Rowe Price factsheet for the fund, the manager states: “While market valuations certainly do not appear cheap, neither do we think that we have entered into ‘bubble’ territory.
“In our view, it is far more instructive to look at valuations in relative terms, against peers and history, and in terms of future growth potential, rather than in isolation on an absolute basis.”
Over five years, the fund – which has an alpha generation of 2.8 and an information ratio of 0.43 – has returned 171.62 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Other funds which, while scoring highly for their five-year high alpha generation and information ratios, fell just short of the mark for their OCFs include Morgan Stanley US Growth, Old Mutual North American Equity and Morgan Stanley US Advantage.