Baillie Gifford American, Morgan Stanley US Growth and BNY Mellon US Opportunities are some of the US funds that have outperformed the S&P 500 in the 2020 rally without relying on broad exposure to the index.
US equities were some of the strongest performers of the decade before the coronavirus crisis. Over the 10 years before the coronavirus sell-off, the S&P 500 had made a 320.19 per cent total return, in sterling, beating the MSCI World (212.22 per cent) and FTSE All Share (117.38 per cent) by a significant margin.
The US market troughed on 23 March and has rallied strongly in the rebound that followed, making a 28.86 per cent return to the end of June and outpacing both the MSCI World and the FTSE All Share.
Performance of sector and index in H1 2020
Source: FE Analytics
The S&P 500 index is one of the most commonly used benchmarks in the IA North America sector and is notoriously difficult to beat due to the US being one of the most heavily researched and most efficient markets.
With that in mind, Trustnet has looked for IA North America funds that had not only outperformed the index during the rally but had done so with the lowest correlation to the index.
It is worth noting that not all funds in the IA North America sector are benchmarked against the S&P 500.
To do this, we considered all actively managed funds in the IA North America sector and then filtered them for top quartile performance from 23 March until the end of June.
On top of that, we filtered for funds with a fourth-quartile r-squared value.
R-squared is a measure of how closely correlated a fund is to an index or benchmark, showing the proportion of the fund’s movements attributed to the index. The values range from 0 to 1, with 0 indicating no correlation at all and 1 being a ‘perfect match’ of the index. A value of 0.7 or above suggests that the fund is closely linked to the benchmark and below 0.5 the correlation begins to disappear altogether.
The average IA North America sector fund has an r-squared value of 0.9 over the period under consideration, which is admittedly a short time frame.
Only 14 IA North America members have outperformed the S&P 500 in the recent rally with a low correlation to the index, which can be seen below.
Funds with top-quartile returns and fourth-quartile r-squared (23 March to 30 June 2020)
Source: FE Analytics
The best performing fund under these conditions was the £4.6bn Baillie Gifford American fund, which made a total return of 70.75 per cent.
It’s managed by Gary Robinson, Tom Slater, Kirsty Gibson and Dave Bujnowski, who run a concentrated portfolio of 30-50 stocks aiming to outperform the S&P 500 index by at least 1.5 per cent per annuum over a rolling five-year basis.
The team aims to achieve this by “harnessing the asymmetry of returns inherent in equity markets”.
Although the fund has a low correlation with the S&P 500 index – its r-squared value is 0.44 – it still holds some of the mega blue-chip stocks found in the market, something it has in common with the other 13 funds on the list.
It is not the case that these funds hold none of the index’s big names, rather they have a more concentrated exposure to the index with high allocation to key stocks. Stocks found in their portfolios are some of the ‘coronavirus winners’ that have thrived during the crisis.
For example, Baillie Gifford American holds Amazon in its top 10 holdings as do most of the funds on this list. Morgan Stanley US Growth, T. Rowe Price US Blue Chip Equity, Franklin US Opportunities, Quilter Investors US Equity Growth, VT De Lisle America and New Capital US Future Leaders all hold Jeff Bezos’ Amazon in its top 10.
Throughout the coronavirus lockdown, the company’s online shopping platform and Amazon Web Services (AWS) cloud business have thrived as consumers were forced to avoid shops, instead going online for both shopping and entertainment.
Amazon’s share price YTD
Source: Google Finance
Amazon’s share price has increased by 70 per cent in 2020 alone.
Going back to the funds and the second-best performer was the $4.4bn Morgn Stnly US Growth fund, which made a 64.88 per cent total return since 23 March with an r-squared value of 0.37.
Run by a six-strong management team, the fund invests in companies with “sustainable competitive advantages”, strong free-cash flow yields and decent returns. One such company it owns is Zoom Video Communications, another ‘coronavirus winner’ in 2020.
Founded in 2011 by Eric Yuan, Zoom has only become a household name since March with millions using it to socialise and work from home.
When it entered the stock market last year Zoom was valued at $15bn, but this has now risen to $38.5bn.
Zoom’s share price YTD
Source: Google Finance
Zoom is also in T. Rowe Price US Blue Chip Equity fund’s top 10.
Other ‘coronavirus winners’ peppered amongst the funds main holdings include e-commerce site Shopify, which also benefitted from the turn to online shopping.
Both Netflix and Disney have reaped the rewards of the lockdown forcing more attention and demand than ever to online entertainment with the latter gaining almost 60 million subscribers in its first H1, while sportswear brand Nike saw the demand for at home sports equipment and clothing soar with gyms forced to shut.
But not every stock which has seen its share price accelerate in the past few months is wholly down to coronavirus.
Both Baillie Gifford American and Quilter Investors US Equity Growth hold Elon Musk’s Tesla, whose share price rise has been down to the company moving from being a niche manufacturer into mass-market electric car maker at a time when interest in more sustainable options is surging.
Tesla overtook Japan’s Toyota this month to become the world’s most valuable car maker, now valued at over $208bn. In 2020 alone, Tesla’s share price has surged over 150 per cent, according to Forbes, despite Musk wiping $14bn off the car company’s value back in May after tweeting that the share price was too high.
The surge in the company’s share price this year is attributed to wave of investors seeking sustainable investment options and having more confidence in the future of electric vehicles, a concept which has rejuvenated the automotive industry.