The US is the world’s largest economy, accounting for almost half of the world’s total capitalisation; despite this, while popular with UK investors, US equities make up a disproportionately small part of most portfolios.
With the traditionally UK centric portfolio looking less and less like a good idea, investors should be looking across the pond for developed world economic growth.
Two funds in the IMA North America sector stand out, the Gartmore US Growth fund and the M&G North American Value fund, primarily for their contrasting styles and fortunes. The last three years have seen almost the full range of market conditions come and go in worryingly quick succession; asset bubbles, a market crash and recovery have all made an appearance. Accordingly the popular yet contrasting growth and value equity strategies have both at times outperformed and underperformed the market.
One of the striking differences between these two funds is how they have performed over different time periods. In the one year period to 8 December 2009 the M&G North American Value fund has clearly outperformed. It is ranked top of its sector and has returned 36.48 per cent versus a return of 15.18 per cent for the Gartmore US Growth fund, with a ranking 61 out of 79 funds.
In comparison the IMA North America sector index returned 19.71 per cent and the S&P 500 index just 11.35 per cent. However , over a longer time period of three years the roles are very much reversed.
The Gartmore US Growth fund made 12.4 per cent putting firmly top quartile with a fifth place finish, while the M&G North American Value fund lost 18.76 per cent to finish second bottom. The sector lost 1.21 per cent over this period and the S&P 500 lost 2.67 per cent. It should be noted that the two funds have different risk profiles, although this is unlikely to affect the funds direction, it makes the amounts less comparable.
Source: Financial Express Analytics
A growth strategy should be expected to outperform in a falling market. At a time when equity prices are dropping, people are prepared to a steep premium for stocks with strong growth potential.
This can be seen in the above chart of the performance of the Gartmore fund; it has outperformed in periods when markets have been falling but underperformed when markets have risen, with the exception of the first quarter 2008 when growth potential counted for nothing as investor abandoned risk assets. Growth potential is less valuable when markets are rising, although good stock selection should still deliver strong long term returns.
Value investing distinguishes itself by looking for undervalued and unpopular stocks that are likely to outperform as they recover to fair value. This contrarian approach is likely to suffer in the short term as markets fall, but should benefit in the long run as distressed stocks recover. This again has been played out in the fund’s performance. The M&G North American Value fund has had excellent short-term returns as deeply depressed value stocks outperform during recovery.
Source: Financial Express Analytics
Long-term value strategies have tended to outperform, over ten years the Russell 1000 Value index has outperformed the Russell 1000 Growth index by 57.26 per cent.
However, both strategies are reliant on good stock pickers to correctly identify the growth and value potential in each stock. By outsourcing the management of the Gartmore US Growth fund to Tom Marsisco, Gartmore have put a proven growth investor at the helm. Likewise M&G’s Richard Brody has over twenty years experience in the US markets.
Both strategies have the potential to outperform and in the long run and ultimately it will be the choice of manager that will be the difference between over and under performing.
| Click here for IMA North America sector: Sector overview |
| Click here for IMA North America sector: Fund managers' viewpoint |
| Click here for IMA North America sector: What the papers say |
| Click here for IMA North America sector: North America funds in focus |
| Click here for IMA North America sector: IFAs' viewpoint |
| Click here for IMA North America sector: Neptune US Opportunities fund |