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Square Mile’s funds for Thanksgiving

14 November 2023

While some prefer to gain this exposure through passives, any reversal in fortune of the Magnificent Seven would have a disproportionately negative impact on such vehicles.

By Ajay Vaid,

Square Mile Investment Consulting and Research

Dating back to a feast shared by the pilgrim fathers and the Wampanoag people of North America in 1621, Thanksgiving today provides an occasion for people across the US to give thanks for the blessings of the previous year. From a market perspective, investors in the US have much to be thankful for.

The US market has been one of the strongest performers in 2023, although its strength lies in its significant weighting to a handful of technology mega-caps – the Magnificent Seven – masking a divergence between the returns of largest 50 stocks in the US relative to the bottom 2,000.

America is not without headwinds. The country goes to the polls in 2024 and as election fever picks up emotions are likely to run high as the Donald Trump and Joe Biden camps pick up their rhetoric.

Internationally, the US is engaged quasi-militarily on two fronts, Ukraine and the Middle East, with the potential of a third front opening should relations with China deteriorate over Taiwan.

Economically, America has so far avoided a recession and the job market seems to be in rude health but while the Federal Reserve may be reaching the end of its tightening cycle it is unlikely to cut rates aggressively any time soon, which may act as a brake on future growth.

Despite these challenges, it is prudent to maintain an exposure to the world’s largest economy within a balanced portfolio. While some prefer to gain this exposure through passives, any reversal in fortune of the Magnificent Seven would have a disproportionately negative impact on such vehicles.

Actively managed funds are therefore a compelling option, but it is important to identify those managers who have consistently demonstrated their ability to successfully navigate the US market.

The AA-rated Artemis US Smaller Companies fund should appeal to investors seeking to grow their capital through exposure to companies further down the market capitalisation scale, thereby providing diversification from the dominant mega-cap stocks.

It is managed by Cormac Weldon, supported by Artemis’ US equity team, who follows a process that combines detailed company analysis with an appreciation of the wider economic environment. This has proven successful across a range of market conditions.

While the team is relatively small, this can be seen as advantageous as it allows swift decision making in a market that can be hit by short, sharp changes in investor sentiment.

The WS Lindsell Train North American Equity fund is another strategy with the potential for delivering capital growth. Launched in 2020, its manager James Bullock and deputy Madeline Wright adopt an unconstrained approach to asset allocation with a high active share and a bias towards quality businesses.

They are primarily focused on absolute returns, seeking to offer durable and sustainable returns over time, although this approach may mean that the portfolio will lag its peers when the market is driven by a small cohort of companies.

Its Square Mile Positive Prospect rating reflects the fund’s relatively short track-record, but we believe it has the potential of being a successful long-term option for investors.

The A-rated Brown Advisory US Mid-Cap Growth fund comes from a firm with a solid heritage in US equities and an exemplary reputation for prudent investing. Co-managers George Sakellaris and Christopher Berrier seek out companies that can benefit from the power of compounding to deliver attractive risk-adjusted returns over the long term.

They are seeking to invest in today’s mid-cap companies, typically between $1.5bn to $40bn in size, which they believe will be the large-caps of the future. They are bottom-up stock pickers, unearthing opportunities through extensive due diligence, applying their 3G screen – a qualitative assessment of a company’s growth, governance and go-to-market characteristics.

While the US equity market is not a natural hunting ground for income investors, the A-rated JPM US Equity Income is a compelling option for those looking for a yield from their US exposure. Clare Hart has managed this strategy since launch in 2008 and adheres to the philosophy that undervalued companies with durable franchises and strong management should generate consistent returns over the long term.

Factors considered include a firm's competitive position relative to its peers, high barriers to entry, a strong brand franchise and the businesses relatively low cyclicality and predictability of returns. Additionally, to be considered for the portfolio, any stock must yield at least 2% at the time of purchase.

For investors seeking a strategy that embraces environmental, social and governance (ESG) considerations as part of its processes, the Responsible A-rated FTGF ClearBridge US Equity Sustainability Leaders fund may be appealing. Its highly experienced managers, Mary Jane McQuillen and Derek Deutsch, have a clear focus on both responsible investing and returns, without compromising one element for the other.

They proactively engage with companies to better understand the ESG issues they face and to determine whether they have a plan to address them. While the portfolio may include companies that seek to impact society positively, it has a greater focus on those with sustainable business models and invests in companies that are deemed to be best-in-class from ESG perspectives.

The managers run a benchmark agnostic, concentrated portfolio with a high active share, although it is designed to offer broad market exposure, with stock picking likely to be the largest driver of returns. Importantly, the group publishes all portfolio holdings and provides the rationale for investment, so investors can clearly see where their money is invested and why.

Ajay Vaid is an investment research analyst at Square Mile Investment Consulting and Research. The views expressed above should not be taken as investment advice.

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