US funds sector review – pace of interest rate rises set to slow

There are signs that interest rate increases from the US Federal Reserve (Fed) might be slowing. The central bank has hiked interest rates six times since March, with four of the increases being sizeable 0.75% jumps.

Jerome Powell, Fed Chairman, recently said it makes sense to moderate the pace of rate increases as the full effects of its policy tightening haven’t been felt yet. This is often referred to as a response lag – it’s the time between a policy change and the economic impact being felt.

Central banks try to narrow this gap by providing forward guidance, communicating the path they expect future policy to take. Nevertheless, a slowing pace of rate increases, and the implication that inflation might have peaked, is likely to be positive for stock markets.

Why have interest rates been going up this year?

Interest rates have gone up as the central bank tries to tame inflation and bring it back down towards its target range of 2%. While it’s still well above target, the rate of inflation has been falling recently. Since June 2022, headline annual US inflation has risen at a slower rate, declining from 9.1% to 7.7% to October 2022.

Interest rate rises increase the rewards for savers looking to earn interest on their cash. However, it makes it more expensive for consumers and businesses to borrow money. Central banks raise interest rates when they want to take the heat out of an economy and reduce demand. They have to balance this with the risk of going too far and slowing growth to the point of tipping the economy into recession.

How are consumers faring?

Consumer spending makes up around 70% of the US economy. That means the financial health of the US consumer is key in determining how well the economy does.

One benefit of the difficult pandemic period for some consumers was the ability to build up some savings as living costs fell. Unsurprisingly, as normal life has resumed, naturally the savings rate has fallen. But there’s still an extra estimated $1.2trn-$1.8trn in the pockets of US consumers in accumulated pandemic savings.

There are some indications of a loosening labour market though. Unemployment was up slightly to 3.7% in October with wages ticking up at their slowest pace in more than a year. If this proves to be part of a broader economic slowdown, it could give the Fed licence to not apply the brake of tightening monetary policy quite so firmly.

There are signs that consumer confidence might be falling though as the cost-of-living challenges stretch household finances.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice.

How have the US Wealth Shortlist funds performed?

Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. Investments will rise and fall in value, meaning you could get back less than you invest.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

The strongest performer out of our Wealth Shortlist US funds over the last year has been the FTF Royce US Smaller Companies fund.

The fund rose in value by 1.32%* over the year, performing better than the Russell 2000 index and the IA North American Smaller Companies peer group average. We’re pleased to see the fund has performed well over this period where more value-focused funds have benefitted from a rotation away from growth. Remember though, past performance isn’t a guide to the future.

The weakest performer over the past year was Baillie Gifford American. The managers’ growth-focused investment style has fallen out of favour with investors.

That’s mainly because of high inflation and rising interest rates. Investors have been less willing to pay up for companies with high growth potential, which has seen stock prices of some of the fund’s investments fall significantly.

Although short-term volatility can feel uncomfortable, we think investors should focus on the long term. This fund aims to perform better than its benchmark over a five-year period, although this isn’t guaranteed. The fund’s style means performance can look quite different over shorter periods.

We don't expect all the funds on the Wealth Shortlist to perform in 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 long-term returns.

How to build a portfolio

Past performance is not a guide to the future. Source: *Lipper IM, to 30/11/2022.

Past performance is not a guide to the future. Source: *Lipper IM, to 30/11/2022.

More about FTF Royce US Smaller Companies including charges

FTF Royce US Smaller Companies Key Investor Information

More about Baillie Gifford American including charges

Baillie Gifford American Key Investor Information

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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.