The North American equity market is notoriously difficult to beat. One reason for this could be due to the incredible breadth and depth of the US capital markets.
The US stock market has far more analysts covering each company than any other market, meaning there is less opportunity for investors to uncover any hidden gems.
Even legendary value investor Warren Buffet has said that most investors would be better off buying a cheap passive fund tracking the S&P 500 than trying to pick a highly paid fund manager.
The S&P 500 index has delivered a total return of 112.5% over the past five years and is a common benchmark managers use to measure themselves against for their performance.
Over the past five years however, there have been 14 funds in the Investment Association’s North America sector that delivered top-quartile performance and charged investors high (bottom-quartile) fees (ongoing charges) for it. Below is the list of funds sorted by performance.
Source: FE Analytics
All of the funds in the list have similar characteristics – they all run high-conviction, highly concentrated portfolios, with large overweight allocations to some combination of the US tech giants Alphabet, Amazon, Microsoft and Apple.
A more concentrated approach means there is more stock-specific risk than a more diversified US equity portfolio like the S&P 500, which tracks 500 of the biggest US-listed companies. However, if done right – it can pay off in the form of higher returns.
The best-performing fund in the list was the GS US Focused Growth Equity Portfolio, which returned 181.6% over the past five years.
Managed by Goldman Sachs Asset Management’s Steven Barry and Steve Becker, the fund runs a concentrated portfolio with a smaller number of holdings (30-40 stocks).
Its biggest three stocks (Alphabet, Apple and Amazon) make up a quarter of its portfolio, and its top-10 make up almost 60% of its portfolio.
Another top-performer in the list was the AB American Growth Portfolio, which delivered a return of 180.7% over the period.
The Alliance Bernstein fund also runs a relatively concentrated portfolio, with just 50 holdings. Managers Frank Caruso, John H. Fogarty and Vinay Thapar look specifically for companies that can grow and persistently earn returns above their cost of capital.
Some other things they look for are businesses with sustainable competitive advantages, transparent business models, attractive economic returns and strong cash generation.
Its biggest three holdings are the big US tech giants Microsoft, Alphabet and Amazon – which again, make up almost a quarter of the fund.
When looking at the top-performing funds with higher-than-average ongoing charges figures, there was a similar trend of highly concentrated funds with large allocations to the big US tech giants.
However, there were a few notable exceptions. These were the Morgan Stanley US Growth fund and the Morgan Stanley US Advantage fund, which both have an OCF of 0.89% – putting them in the third quartile in the sector for fees. Both strategies are headed up by Dennis Lynch.
The Morgan Stanley US Growth fund has delivered an impressive 315% return over the past five years, and the Morgan Stanley US Advantage fund notched in a 184.6% return over the same period.
Although they are both highly concentrated like many of the above funds, they do not have top-10 allocations to the big US tech giants and are instead overweight in certain emerging technology companies.
Morgan Stanley US Growth for example, has up-and-coming US technology firms Cloudflare and Snowflake making up two of its largest positions at 8% and 6.33% respectively.
Cloudflare is a $50bn (£37.8bn) software company that provides web infrastructure and website security to companies to prevent distributed denial-of-service (DDoS) attacks, which often cause costly website outages and security breaches.
Snowflake is a $110bn software company that provides cloud computing data warehousing services to companies who wish to store their data on the cloud.
Dennis Lynch is not alone in his optimism for Snowflake. Despite Warren Buffett’s well-documented aversion towards software companies, he holds a stake in Snowflake via Berkshire Hathaway.
Although the above funds have managed to comfortably beat the S&P 500 over the past five years, investors tracking the Nasdaq 100 index are among the very few that would have also managed to comfortably beat the IA North America sector – but at a low cost.
The Invesco EQQQ Nasdaq 100 UCITS ETF for example, managed to deliver an impressive 219.5% return by tracking the index with an OCF of 0.3%.
The index tracks the biggest non-financial companies in the US, which is comprised mostly of technology and biotechnology stocks.
Although the index is not quite as concentrated as many of the funds in the list above, the benchmark-weighted index still has similarly large weightings to all of the big US tech companies.