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North America sector

North America sector

Funds which invest predominantly in the shares of North American companies. Most place an emphasis on capital growth, but some also aim to generate income.

Dominic Rowles - Investment Analyst
31 May 2017

  • The US economy is currently in reasonable health. Unemployment is low while many consumers and businesses have received a boost from lower energy and commodity prices. US share prices are well above their long-term averages but we do not see an imminent catalyst for a significant reversal in fortune for US shares.
  • The S&P 500 rose 5.5% in dollar terms during Donald Trump’s first 100 days as US President. He continues to push his pro-growth agenda, which includes significant tax cuts, deregulation and increased defence and infrastructure spending, although he has already faced some policy setbacks. The next few months will prove crucial as the President seeks to deliver on his election promises.
  • Consumer confidence has increased dramatically since Donald Trump’s election and recently hit a 17-year high. It had been on a downward trend since the end of 2014, held back partly by a lack of wage growth.
  • The US stock market, as measured by the S&P 500 Index, grew 17.9% in the year to April 2017. However, the pound weakened significantly against the dollar, which boosted returns for UK-based investors, and the index grew 33.5% in GBP terms. The Russell 2000 Index of US smaller companies grew 42.2% over the same period in sterling terms. Please note this is a short time period and past performance is not a guide to the future.

Stock market & sector performance - year to April 2017

Past performance is not a guide to the future. Source: Lipper IM to 30/04/2017

Our view

The US is the world’s largest economy as well as its largest stock market. The country is home to many global businesses which dominate their field and overall the US accounts for almost half the global stock market.

We believe it is simply too big a call to omit such a dynamic and innovative economy from consideration. Most diversified portfolios should contain at least some exposure to the US market. However, it is one of the most heavily researched markets in the world. Share prices are extraordinarily quick to react to new information and this efficiency means it is difficult, although not impossible, for active fund managers to consistently unearth overlooked opportunities or gain an edge over fellow investors.

For exposure to larger US companies we feel a low-cost passively-managed fund could be considered. We continue to seek US fund managers with the potential to perform well over the long term, but currently believe there are more opportunities for active fund managers to add value among higher-risk smaller and medium-sized companies. This is therefore where our Wealth 150 exposure is concentrated.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

The US stock market has recovered phenomenally well from the 2007/08 financial crisis. The S&P 500 closed at a low of 676.5 on 09 March 2009 and has since rebounded to 2384.2, as at the end of April 2017. Once currency moves and dividends are factored in the market has grown 274.8% in sterling terms.

Over the past five years the US has been the best-performing major market for UK-based investors. Healthcare and consumer-focused companies have performed well over this period, to the benefit of funds with significant exposure. Oil & gas was the worst-performing sector, although it still delivered growth of almost 29.2% over five years, helped by a strong run of performance in 2016. Despite this burst of performance, the share prices of companies in the industry remain some way from previous highs.

Performance of the US companies over 5 years (GBP, dividends reinvested)

Past performance is not a guide to future returns. Source: Lipper IM to 30/04/2017.


By and large investors have continued to favour companies with dependable earnings and those perceived to have superior growth potential, even when the going gets tough.

In recent years growth in company earnings has not kept pace with rising share prices and the stock market now looks overvalued, according to our analysis. We believe company earnings drive share prices over the long term. If the earnings growth implied by current share prices fails to materialise we believe investors could be in for disappointment. There is a risk share prices could fall to reflect the more sombre earnings backdrop.

Some commentators claim ‘this time is different’ for the US market. The glass half-full argument suggests the US is home to exciting technology companies, such as Apple, Alphabet (Google), Facebook and Tesla. They have become global icons with very few, if any, serious competitors. The potential to maintain and increase profits could justify their share prices climbing ever higher. Or so the argument goes.

Similarly, some consumer-focused companies have performed well. Even though this is a competitive sector the US is home to world-leaders such as Nike, Disney, Visa and Dr Pepper Snapple. Their potential to generate recurring revenue and remain popular, even in a low-growth world, is often cited as reason to remain positive.

The counter argument is that earnings don’t rise forever and the share prices of some companies suggest there is little margin for error. We think investors should tread with caution when it comes to the US stock market. On valuation grounds it does not look especially attractive, but this is not to say the market should be avoided entirely, or returns will be poor. An expensive market can continue to perform well, just as a cheap market can fall further.

We believe the stock market is an excellent home for long-term investments and for many investors this could include some exposure to the shares of US companies. We don’t feel there is currently a compelling case to aggressively increase exposure and would favour taking profits when the market does well before rotating into areas which offer greater value.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA North America sector

    +118.8%

Data correct as at 30/04/17. Please remember past performance is not a guide to future returns.

Fund reviews

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent North America sector review. They are provided for your interest but are not a guide to how you should invest. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at May 2017. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 150. There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Wealth 150 Fund reviews

Other Funds in the sector

The managers invest in a broad range of US companies they perceive to be undervalued, including higher-risk smaller companies. They seek companies that generate strong cash flow, which could enable dividend growth over time.

The fund underperformed the sector average and the S&P 500 over the past year, despite strong contributions to performance from computing giant Microsoft and communications company Motorola Solutions. The managers are currently seeking new opportunities in areas that have experienced recent weakness and offer greater value, such as the more defensive sectors. According to our analysis, the managers have added little value through stock selection over the past decade and we would like to see this improve before considering the fund for the Wealth 150.

The manager seeks high-quality companies with a durable competitive advantage that are trading at a discount to what he calculates to be ‘fair value’.

The team behind this fund are well-incentivised to focus on delivering strong long-term performance for investors. Most opportunities have been found in the software and computer services sector, and the fund’s largest investments include social network Facebook and online retailer Amazon. This fund invests in a concentrated number of stocks, which is a higher-risk approach. Performance since launch in April 2013 has been respectable but this is a relatively short time period. The manager’s ‘growth’ style of investing has largely been in favour since launch and we would like to see how the fund performs when his style is out of favour for a sustained period before considering it for our Wealth 150.

This fund invests in between 40 and 60 large and medium-sized companies. Despite the US stock market’s ability to react rapidly to new information, the managers believe they have identified a number of trends that their investment process aims to exploit.

This is a concentrated portfolio so each investment can contribute significantly to performance, but it is a higher-risk approach. The fund is currently biased towards financials, healthcare and technology companies. Andrew Holliman has a long track record investing in US equities, but it has been inconsistent at times. We would like to see him develop a longer track record at Polar Capital before we consider the fund for a spot on our Wealth 150.

Please note this fund is domiciled offshore and investors would not normally be entitled to compensation through the UK Financial Services Compensation Scheme.

The manager focuses on three types of company: those that demonstrate strong history of growth and improving levels of cash; companies which generate dependable earnings and revenues; and companies that are undergoing positive change that is not recognised by the market.

This fund invests in a broad range of smaller companies that have the potential to outperform their larger peers over the long term, although they are higher-risk. The fund has a large exposure to financials and its largest investments include banks Western Alliance Bancorp and Privatebancorp. The manager has a good long-term track record, although she has experienced some prolonged periods of underperformance.

The manager targets larger companies with the potential to grow dividends over time. There tends to be a blend of attractively-valued companies and those with the potential for impressive growth.

John Weavers took over this fund in April 2015 with the aim to turn performance around. He believes focusing on dividends instils discipline in company management. If they commit to paying sustainable and rising dividends they are less likely to fritter cash generated by the business on uneconomic growth or unnecessary acquisitions. The manager has delivered better performance than the average fund in the sector so far, but it remains early days. The fund invests in a concentrated number of stocks, which is a higher-risk approach.

The manager seeks out of favour companies, including those recovering from hard times, where he believes prospects are not being appreciated by other investors. There is a focus on value and larger companies.

An emphasis is placed on resilient business models and companies in good financial health. There is currently a bias to technology companies and those in the industrials sector. Angel Agudo has done a good job since taking over management of this fund in December 2012, but we would like to see a longer track record of success before considering the fund for the Wealth 150.

The manager combines three different types of medium-sized company into a diversified portfolio: those she thinks are expected to deliver steady growth year after year, those with growth potential not factored into the share price, and those undergoing a turnaround.

Jenny Jones is a highly experienced investor and performance over the past few years has generally been good. The fund’s focus on medium-sized companies means it could offer diversification and dovetail well with funds focused on larger US companies.

This fund focuses on companies the manager expects to achieve above average growth in earnings. As well as a growth-focused approach there is a bias to smaller and medium-sized companies, which are higher risk.

Aditya Khowala took over management of this fund in September 2015. It has been a tough start and the fund has underperformed the S&P 500 Index and the average fund in the sector so far. This is only over a short period though and we feel it is too early to judge the manager.

The manager aims to invest in smaller and medium-sized businesses in robust financial health and with growth potential that is being overlooked by other investors. Please note smaller companies are higher risk.

The fund has risen in value in recent years, but not to the same extent as its benchmark. A lack of exposure to the strongly performing healthcare sector held back recent performance. On the other hand, exposure to more economically-sensitive areas of the market, including the industrials sector and companies that rely on consumer discretionary spending, added value. We believe the manager has the potential to turn performance around over the long term and the fund retains its place on the Wealth 150 list of our favourite funds in the major sectors.

This fund aims to track the performance of the FTSE USA Index, a broad index of around 650 large and medium-sized American companies.

Legal & General are one of the most conservative tracker fund managers. Almost all funds are fully physically replicated, which means they buy every stock in the index. This allows them to track the index precisely. Indeed, the fund has tracked the index tightly and efficiently over both the short and longer term and it has lost little value due to annual charges. We continue to believe this fund is a good option for low-cost exposure to the US stock market.

Latest research updates

  • Fund manager Lauren Romeo has not changed her investment approach since Donald Trump’s election victory
  • The manager continues to seek good-quality companies trading below their true worth
  • She believes Trump will have some positive impact on the US economy as he is seen as pro-business

Our view

Lauren Romeo, manager of the Legg Mason IF Royce US Smaller Companies Fund, seeks good quality companies. They should be in a strong financial position, with little or no debt and a track record of making a good return on the capital invested in the business. She aims to invest when these qualities are not being appreciated by other investors and the company is valued below its true worth. It is an approach we favour and the fund retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Lauren Romeo remains optimistic in her outlook and we feel the long-term prospects for this fund are positive. The manager is part of a well-resourced team with a long and impressive track record of generating strong returns for investors. We are also encouraged to see an improvement in the performance of the fund after a couple of tough years, though as always past performance is not a guide to future returns. In our view this fund provides investors with an excellent opportunity to gain access to the exciting long-term growth potential of US smaller companies. Please note, smaller companies tend to be higher risk than their larger counterparts.

Fund review

Donald Trump’s surprise US election win last November was followed by initial sharp falls in stock markets across the world. The falls were relatively short-lived with the US market closing higher when it became clear Trump had been victorious. Despite some of his more controversial ideas the new President is broadly seen as pro-business, with the aim to boost America’s growth.

It is too early to tell exactly what his presidency will bring, but Lauren Romeo is optimistic on his ability to have some positive impact on the US economy. That said, she doesn’t make investment decisions based on the economic or political outlook; and her investment approach will not change under a Trump presidency.

In recent years the manager's ‘value’ style of investing has been out of favour. Instead investors have favoured ‘growth’ companies that have more stable and predictable growth prospects. Similarly, indebted companies have performed well as the low interest rate environment has allowed them to service debts at ever cheaper rates; companies that Lauren Romeo generally does not invest in. However the manager’s value style came back in to favour in the latter part of the year.

In 2016 the fund’s bias to the industrials and IT sectors boosted performance. SAIA, an interstate trucking company, and Mentor Graphics, a multinational supplier of electronic design automation tools performed particularly strongly. The fund has limited exposure to biotech and healthcare stocks because the manager feels these are speculative investments, with small companies in this sector producing lower revenues. Low exposure to this sector proved beneficial over the last 12 months as the sector fell sharply over fears Hillary Clinton, if elected would introduce drug price regulation.

The fund’s investments in the financial sector, consisting largely of asset management companies including Lazard, dragged on performance. The manager retains her conviction in these investments and feels that their current share prices are not reflective of their true value. For instance, Lazard has significantly improved its cash flow, something the manager feels the market is yet to recognise. Donald Trump is also expected to ease regulation, which could benefit the sector.

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Legg Mason IF Royce US Smaller Companies 4.6 26.6 6.6 -7.3 50.1
Russell 2000 11.2 36.2 11.4 1.1 44.7
IA North American Smaller Companies 7.5 36.4 9.6 2.5 39.9

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2016

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Fund research

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