Morgan Stanley US Advantage, Baillie Gifford American and T. Rowe Price US Blue Chip Equity are among a handful of funds that have outperformed the S&P 500 index over the long term without relying on the strongly performing US blue-chip index.
The S&P 500 – a commonly used benchmark for investors in US equities and US equity strategies – is notoriously difficult to beat as it is one of the world’s most efficient and heavily researched markets.
Over the 10 years to last month-end, the S&P 500 made a total return of 322.79 per cent in sterling terms compared with a 262.1 per cent for the average IA North America fund.
Performance of index vs sector peer over 10yrs
Source: FE Analytics
As such, FE Trustnet decided to find out which funds have outperformed the market with the lowest correlation to the index over the long term. It should be noted, however, that not all funds in the IA North America sector are benchmarked against the S&P 500 index.
To do this we considered the 75 actively managed funds with a 10-year track record to last month-end (30 September 2019) and then screened these further to see which strategies had a bottom-quartile r-squared figure while outperforming the S&P 500 index.
The r-squared measure indicates how closely correlated a fund is to an index with values ranging between 0-1. A fund with an r-squared value upwards of 0.7 suggests it is increasingly linked to an index, while below 0.5 the correlation begins to disappear completely.
The best-performing fund on our list is the Morgan Stanley US Advantage fund, which has made a total return of 460 per cent over the past 10 years, albeit with a relatively high r-squared ratio of 0.69.
The $8.5bn, five FE Crown-rated fund is team-managed and is benchmarked against the S&P 500 index.
The Morgan Stanley US Advantage was launched in 2005 and seeks out high-quality, established companies with strong brand recognition, sustainably competitive advantages, strong free cash flow and favourable returns on invested capital.
Given Morgan Stanley US Advantage relatively higher r-squared it may be important to note that it has the highest alpha ratio – a measure of a fund’s over- or underperformance of a benchmark – of the highlighted funds.
Performance of fund vs sector & benchmark over 10yrs
Source: FE Analytics
It was closely followed by sister strategy, the $2.4bn, five FE Crown-rated Morgan Stanley US Growth fund, which is also managed by the same team but differs by also investing in emerging companies.
It has made a total return of 452.42 per cent and has the second-lowest r-squared figure of the 10 funds given its broader investment universe. It is benchmarked against the small-cap Russell 1000 Growth index.
The fund with the lowest r-squared ratio from our list is a specialist equity strategy, GAM Multistock Health Innovation Equity, which has a figure of 0.39.
The fund, which targets long-term capital growth by investing in ‘innovation-driven’ companies in all healthcare sub-sectors, has made a total return of 364.23 per cent.
The $132.3m fund is managed by Christophe Eggmann and invests in areas such as pharmaceuticals, biotechnology, healthcare services & supplies, medical technology and specialty pharmaceuticals.
While it sits in the IA North America sector, it invests around the world and is benchmarked against the MSCI World Health Care index, explaining its low correlation to the S&P 500 index.
Notwithstanding its global equity remit, it does hold 83.6 per cent of the portfolio (as at 30 September) in US equities.
Source: FE Analytics
After GAM Multistock Health Innovation Equity and Morgan Stanley US Growth, the fund with the next lowest r-squared figure is Baillie Gifford American, whose figure is 0.60.
The fund house is well-known for its growth approach to investing and the four FE Crown-rated strategy has returned 417.71 per cent over the past 10 years.
The £2.2bn fund is overseen by Gary Robinson, Helen Xiong, Tom Slater and Kirsty Gibson and is benchmarked against the S&P 500 index, which it aims to outperform by at least 1.5 per cent per annum over rolling five-year periods.
The team take a bottom-up approach to investing and aim to build a concentrated portfolio of 30-50 stocks on which they take a five-year view.
Another notable fund from the list is the £846.6m T. Rowe Price US Blue Chip Equity fund, managed by FE Alpha Manager Larry Puglia.
The five FE Crown-rated mid- and large-cap equity strategy invests for the long term through a portfolio of stocks with “a leading market position, seasoned management and strong financial fundamentals”. Typically, these stocks are found in growing areas of the market and exhibit sustainable growth.
The fund has made a total return of 432.03 per cent and has the second-highest r-squared figure (0.73) after the $2.1bn, actively managed Vanguard US Opportunities fund overseen by US asset manager PRIMECAP, which has an r-squared of 0.74.