Large-cap growth funds and exchange-traded-funds tracking the Nasdaq 100 outperform by a wide margin when broader markets are rallying, according to data from FE Analytics taken over the past five years.
It has been a choppy start to the year for the US equity market as investors have struggled with rising inflation expectations, the withdrawal of monetary support from the Federal Reserve and the global implications of the ongoing conflict between Russia and Ukraine.
Growth stocks are still down significantly from their highs and despite the commodity price shock stemming from the war in Ukraine, energy and mining stocks are still suffering from bouts of volatility.
But after the US Federal Reserve officially announced its first rate hike last week and provided guidance for the rest of the year, US equities experienced a strong rally to close the week.
The S&P 500 index rallied 7% from its yearly low over the span of just a few days.
Performance of S&P 500 index year-to-date
.png)
Source: FE Analytics
Although it remains to be seen as to whether last week proved to be a good chance to ‘buy-the-dip’, for the less-risk averse investor there are certain funds that tend to rally even more than the wider market during up markets to potentially take advantage of.
These funds can be identified by looking at its upside capture ratio. Of the 181 equity funds in the Investment Association’s North America sector with a five-year track record, Trustnet identified 26 strategies that had an upside capture ratio above 130, meaning they outperformed their peers by 30% or more when markets were green.
Source: FE Analytics
The funds with the highest upside capture ratios were predominantly large-cap growth funds, however almost half of all the funds in the table above use the Russell 1000 Growth index as a benchmark.
This index focuses on both the large-cap and mid-cap growth portion of the US equity market, featuring companies that exhibit growth characteristics such as higher price-to-book ratios and higher sales growth forecasts.
However, the funds featured in the table above do not have similar holdings to the Russell 1000 Growth index, which holds large positions in the mega-cap technology stocks such as Apple, Alphabet and Microsoft.
The Morgan Stanley US Growth strategy for example, run by FE fundinfo Alpha Manager Dennis Lynch and his team, has highly concentrated positions in less widely known technology stocks, making it vastly different to its benchmark index.
Despite being down significantly from their highs, cloud-computing data warehousing company Snowflake and website security company Cloudflare make up almost 15% of the fund’s portfolio, versus 0.38% of the Russell 1000 Growth index.
Elsewhere, the PGIM Jennison US Growth strategy also differs from its Russell 1000 Growth index benchmark through its relative positioning, with overweight positions in Amazon, Tesla and underweight positions in Apple and Microsoft.
Managed by Natasha Kuhlkin, Blair A. Boyer, Kathleen A McCarragher and Rebecca Irwin, the team still focuses on predominantly large-cap stocks – with some positions in European and Asia as well as the US.
Similarly, the Lord Abett Innovation Growth fund, run by Brian McGreal, Josh Betts, Peter Hubbard and Travis Trampe, also focuses on large-cap stocks but exhibits relative underweight positions in the majority of the big US tech giants.
It is underweight Apple, Meta Platforms, Amazon and Microsoft – but maintains an overweight position in Alphabet.
The Baillie Gifford American fund stands out as the fund with the highest upside capture ratio of 207.4 – which means that it has captured more than double every upward move made by the average US fund over the past five years.
Run by Scottish Mortgage’s Tom Slater, alongside Gary Robinson Kirsty Gibson and Dave Bujnowski, this fund also takes overweight positions in companies not largely held by the wider indices.
For example, its largest holding is now in The Trade Desk, a software company used by digital ad buyers.
Baillie Gifford’s managers are known for being benchmark agnostic in their investing approach, which over the years has allowed them to benefit from early positions in Amazon, Tesla and Moderna – all of which still form top positions of the fund.
Elsewhere in the table, it is worth noting the presence of two Nasdaq-100 index trackers: namely the Invesco EQQQ Nasdaq 100 UCITS ETF and BlackRock’s iShares NASDAQ 100 UCITS ETF.
The Nasdaq 100 index has heavy weightings to the FAANGs and big tech stocks, which have outperformed over the past five years. It has roughly half of its portfolio in seven of the big US technology companies: Apple, Microsoft, Amazon, Tesla, Nvidia, Alphabet and Meta Platforms.
These stocks form the vast majority of the Nasdaq – where the largest 20 companies make up roughly two thirds of the market capitalisation-weighted index.
However it also benefits from its various holdings in some of the up-and-coming technology and biotechnology companies that many of the active funds previously mentioned hold.