After a decade-long run, in which US equities were the dominant driver of global stock market returns, the past five months have been a wake-up call to investors that had rested on their laurels for too long.
Over the past decade, growth companies in America such as online retailer Amazon and electric car maker Tesla have soared as weak economic growth and a large pool of available capital meant investors forced cash into stocks that were fast-growing.
However, this year high inflation and rising interest rates have caused investors to rethink this approach, with many pulling their money out of these stocks that are now expensive relative to other options. As a result, the growth-heavy NASDAQ 100 index has dropped 18.7% from the start of the year.
One area they have been moving their cash to is value – undervalued assets that they believe have the chance to rebound.
However, it is unclear whether the recent collapse in the growth style of investing is sustainable, or if it will return to the trend of the past decade in the coming years once inflation has reduced and interest rates have normalised.
It is therefore important for investors to have exposure to both styles within their portfolio, according to Sam Buckingham, investment analyst at Kingswood.
Although short-term underperformance has put the US somewhat out of favour, he said that “it’s still the main market where you have the best growth opportunities” and should not be ignored by investors.
As a way to minimise the risk of backing value or growth, he said investors should buy one of each, tilting the allocations where appropriate, but keeping a hedge and owning both regardless of the economic situation.
Buckingham recommended the Brown Advisory Sustainable US Growth fund as the best way to gain exposure to growth in the US.
The main appeal for him was its well diversified portfolio of between 30-40 holdings, which contrasts with many growth funds.
Most growth portfolios are too concentrated and face the risk of sharp drops when their small number of assets underperform, according to Buckingham.
He said: “The risk of growth traps in these funds are particularly high at the moment where some of these growth names are getting absolutely smashed if they disappoint on earnings.
“You can get some of these high out-and-out growth funds which have 10% positions which just scares me – I'm not sure that's sensible.”
Contrastingly, the Brown Advisory Sustainable US Growth fund spreads risk across a wider number of assets, with its largest holdings in Microsoft, UnitedHealth and Visa each at 4.9% of the portfolio.
The fund is up 128.8% over the 10 years, beating its peers in the IA North America sector by 59.7 percentage points and also outperforming the Russell 100 Growth benchmark by 17.8 percentage points.
Total return of fund over the past 10 years
Source: FE Analytics
However, the fund has dropped 20.3% since the start of the year as the financial environment that helped it thrive has shifted.
Although returns were lower than both the sector and benchmark by 9.5 and 2.2 percentage points respectively, Buckingham said that the fund will “obviously struggle” this year.
Meanwhile, his favourite US value pick, the Dodge and Cox US Stock fund, is up 2.6% since the start of the year, a strong return when compared with the IA North America sector, which is down 10.9%, and the S&P 500 benchmark, which has dropped 7.9%.
It has also outperformed over the long-term, beating both the index and sector. It has made 358% over the past 10 years.
Total return of fund over the past 10 years
Source: FE Analytics
Buckingham said that its long track record of outperformance made it his preferred value fund, stating: “I think if you want one value fund then the Dodge and Cox one is the strongest option"
Having exposure to both funds within his portfolio has given him exposure to a broad part of the US market and helped to minimise losses while growth and value fluctuate.
He added: “They’re each looking at completely different parts of the market, so they complement each other from that perspective. They’re relatively uncorrelated because of that and offer very different exposures to all parts of the market.”
Even so, Buckingham has a stronger conviction for the Dodge and Cox fund because he anticipated value investing to outperform growth in the long run.
He said: “If I had to have a portfolio of just those two funds, I’d very much tilt towards value. I’d probably have 75% in Dodge and Cox and 25% in Brown Advisory based on my own view of where we are on value versus growth.”