US funds sector review – economic support continues to lift markets

The impact of Covid-19 on the economy and people’s health continues to be huge in the US. Daily case numbers now regularly total hundreds of thousands and the country’s death toll now tragically exceeds 300,000, the highest in the world.

Turning to politics, since our last US quarterly review in September, we’ve seen the conclusion of the US election. Democrats Joe Biden and Kamala Harris will be taking to the White House as the President and Vice-President after beating incumbent Donald Trump. Biden secured just over 81 million votes – the most any Presidential candidate has had in history.

We look at what else has happened across the pond in recent months, sharing our outlook for the economy and the stock market. We also take a closer look at how different areas of the market have performed, and how funds have fared.

This article isn’t personal advice. If you're not sure if an investment is right for you, please seek advice. Investments rise and fall in value, so you could get back less than you invest.

What can we expect in 2021?

As we head into 2021, stock markets not just in the US but around the world are likely to remain sensitive to news about the virus. Although the situation remains grim, there are reasons for optimism over the coming months.

The US Food and Drug Administration (FDA) have approved for two vaccines, one developed by Pfizer and BioNTech, and the other by Moderna. The vaccines, which are reported to be 95% and 94% effective, offer real hope we’ll see a return to normality.

Until this point is reached, the level of support from the Federal Reserve and US government will be what investors keep their eyes closest on.

Since the start of the crisis, total support rolled out has added up to more than $3trn. It works out to about 14% of the country’s total economic output (GDP) in 2019.

On 21 December US Congress voted to approve an extra $900bn of support. The package has since been approved by President Trump. It includes almost $300bn in small business relief, as well as payments of up to $600 for American adults.

The stimulus package should prove an economic shot in the arm for the US. However, there are still calls for more targeted relief.

There’s evidence that higher income groups in the country are spending less. Some people are accumulating disposable income which could go on to benefit the economy if released. On the other hand, lower income groups, who have less financial wiggle room, have depended heavily on government support schemes.

2021 will also see the 26th United Nations Climate Change Conference, also known as COP26, taking place in Glasgow, Scotland. Joe Biden’s already confirmed that re-joining the Paris agreement is an immediate priority for his administration, targeting a 100% clean energy US economy with net-zero emissions by 2050.

How have US funds performed?

The IA North America sector, which shows the average performance of funds investing in the region, has fallen behind the FTSE USA index over the last year. The IA North America peer group returned 14.7%* compared with 15.9% for the index. Past performance isn’t a guide to the future.

Similar to the last few quarters, the best performing fund in the IA North America sector over the last 12 months has been Baillie Gifford American. Remember 12 months is a short time frame over which to measure performance, and past performance isn’t a guide to the future.

Past performance is not a guide to the future.*Source: Lipper IM to 30/11/2020

How have funds investing in the US performed compared to those investing in other markets?

There’ve been big differences in the way different stock markets performed last year. All major markets actually fell at the height of the crisis. The big difference has been in the rebound.

The average fund investing in the China/Greater China region lead the way, growing 33.5%* over the last 12 months. This dwarfs the 14.7% and 16.8% made by IA North America and IA North American Smaller Companies sectors, respectively, over the same time.

Although funds investing in the US have lagged those investing in China, they’ve fared much better than some other markets.

Chart showing performance of different stock markets

Past performance is not a guide to the future. *Source: Lipper IM to 30/11/2020.

What the Research team has been doing

We’ve spent the quarter continuing our deep analysis looking for fund managers with great long-term performance potential investing in the United States. There are two parts to our fund analysis, the data-crunching quantitative, and the in-depth qualitative.

As part of our qualitative research this quarter, we spoke to Stephen Kelly, lead manager of the AXA Framlington American Growth Fund. Kelly looks for American companies which have clear open-ended growth opportunities ahead of them. These businesses are often leaders in their field with strong balance sheets and robust unit driven revenue growth. It’s also important that the management of these companies have a proven record capitalising on opportunities in the past. This gives Kelly confidence that they could be able to replicate this success. The fund doesn’t currently feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

Find out more about AXA Framlington American Growth including charges

AXA Framlington American Growth Key Investor Information

How have our Wealth Shortlist funds performed?

The strongest performer over the last year has been the Baillie Gifford American fund which has returned an extraordinary 110.5%*. Like lots of other high-performing funds, Baillie Gifford American has benefited from being invested in fast growing companies.

We’re pleased with the funds strong performance and to see that it’s benefitting from the digital transformation taking place across the economy. It’s important to note though that outperformance on this scale is rare – it’s not a guide to future returns.

Baillie Gifford American is co-managed by Tom Slater, Gary Robinson, Dave Bujnowski and Kirsty Gibson. The managers look for companies with high growth potential that they think can deliver exceptional long-term returns. They think there aren’t many companies that can do this, so run a relatively concentrated fund of between 30 and 50 stocks. Each company can make a big difference to returns, although this approach increases risk. Over the past year, electric vehicle makers Tesla, e-commerce platform Shopify and software platform Trade Desk have been the biggest contributors to the fund’s performance.

Artemis US Smaller Companies, managed by the experienced Cormac Weldon has also had a good year, outperforming its benchmark index the Russell 2000. Weldon invests in higher-risk smaller companies that he thinks have a 2:1 ratio of upside potential versus downside risk from the current market price.

The Artemis US Smaller Companies team then spends time modelling what could happen to key measures of a company’s success. They look at factors like profitability and growth over time, as they’re likely to have the greatest impact on its future valuation. He then builds the portfolio with these ratios in mind. The fund only invests in 40-60 companies out of the thousands that make up the index which can increase risk.

The weakest performer of our US selections has been the Legg Mason IF Royce US Smaller Companies fund, run by Lauren Romeo. The fund has gained 3.2%* compared with 10.1% for the Russell 2000 index. The manager’s focus on valuation has been out of favour recently. We still think the fund harnesses the skill of a talented team with a sensible investment approach.

We don’t expect the funds on the Wealth Shortlist to perform in exactly the same way. We think it’s important for investors to build a portfolio filled with managers who have different approaches and investing styles to help generate returns.

Past performance is not a guide to the future. *Source: Lipper IM to 30/11/2020

Past performance is not a guide to the future. Source: Lipper IM to 30/11/2020.

 

Find out more about Baillie Gifford American including charges

Baillie Gifford American Key Investor Information

 

Find out more about Legal & General US Index including charges

Legal & General US Index Key Investor Information

 

Find out more about Artemis US Smaller Companies including charges

Artemis US Smaller Companies Key Investor Information

 

Find out more about Legg Mason IF Royce US Smaller Companies including charges

Legg Mason IF Royce US Smaller Companies Key Investor Information

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