The US is a notoriously difficult market for active managers to beat. The sheer number of analysts concentrating on each stock makes it difficult for professional investors to gain an advantage over their peers, meaning that often the only difference between strategies is cost – which is why passives tend to do better than their actively managed peers.
However, some active managers have been able to buck this trend – data from FE Analytics shows that nine funds in the IA North America sector have beaten the index over one, three, five and 10 years.
Critics of active management point out that many funds that have claimed to have outperformed in the US often hold companies further down the market cap scale, where potential gains are greater, yet compare themselves to the large-cap S&P 500 benchmark.
However, six of the nine – some of which focus exclusively on large caps – have also beaten the Russell 2000 index over each of the time periods mentioned above.
Performance of funds vs sector and indices
Source: FE Analytics
In first and second place over 10 years are the Morgan Stanley US Growth and Morgan Stanley US Advantage funds with gains of 453.79 and 445.62 per cent respectively over the past decade. This is compared with 279.76 per cent from the S&P 500 index and 235.63 per cent from the sector.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
The two funds have the same management team, headed up by Dennis Lynch, which looks for high-quality companies with sustainable competitive advantages, strong free cash-flow yields and favourable returns on invested capital trends. It focuses on long-term growth rather than short-term events, with stock selection “informed by rigorous fundamental analysis”.
The only difference in the strategy of the two funds is that while Morgan Stanley US Advantage looks solely at established companies, Morgan Stanley US Growth will consider “emerging” ones as well. While there is some difference in the funds’ top-10 holdings, they have a high correlation of 0.87 per cent.
Both funds are offshore Sicavs domiciled in Luxembourg. Morgan Stanley US Advantage is $7.6bn in size and has ongoing charges of 0.89 per cent. The $2.8bn Morgan Stanley US Growth fund has ongoing charges of 0.94 per cent.
In third and fourth place with gains of 407.04 and 382.21 per cent over the past decade are T. Rowe Price US Large Cap Growth Equity and T. Rowe Price US Blue Chip Equity.
The funds have different managers and slightly different objectives – the latter invests in mid-caps as well as large-caps, while the former focuses on the top end of the market – but they have similar portfolios and a correlation figure over 10 years of 0.99.
While both are Sicavs with limited availability for retail investors, T. Rowe Price launched a UK Oeic version of the $1.8bn US Large Cap Growth Equity fund in May this year. It currently has just £1.6m in assets under management and has ongoing charges of 0.82 per cent. The $627.8m T. Rowe Price US Blue Chip Equity fund also has ongoing charges of 0.82 per cent.
Baillie Gifford American, which is co-managed by Gary Robinson, Helen Xiong, Tom Slater and Kirsty Gibson, finished in fifth place over 10 years with returns of 379.55 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The fund invests in stocks with a probability of at least 20 per cent of growing by 2.5 times or more over the next five years.
“Baillie Gifford American aims to identify exceptional US-listed businesses and own them long enough such that the benefits of their business models and strength of their cultures become the dominant drivers of their stock prices,” said analysts at FE Invest.
“The fund’s benchmark-agnostic approach is encouraging where the team pays no attention to benchmark constituents/weights when constructing the portfolio. The team does not want to dilute the impact of strong companies in the name of diversification.”
Baillie Gifford American divides companies into three categories: transformational – those that use new technology to transform existing industries; dynamic – those that reach their customers using physical rather than digital channels; and, enduring – those with a smaller growth rate and longer holding period.
Since inception, the transformational bucket has accounted for the largest bulk of the portfolio at around 60 per cent. The fund is £1.8bn in size and has ongoing charges of 0.52 per cent.
Last up is Legg Mason ClearBridge US Large Cap Growth, with gains of 366.71 per cent over the past decade.
The fund, managed by Peter Bourbeau and Margaret Vitrano, invests in a concentrated group of large-cap stocks. Its core holdings are companies that are dominant in their respective industries, global in scope and have a long history of strong performance.
Legg Mason ClearBridge US Large Cap Growth is $1.5bn in size and has ongoing charges of 1.71 per cent.