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US funds sector review – a recovery gaining traction

We take a closer look at how different areas of the US stock market have performed, how funds have fared, and share our outlook for the future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The US vaccination programme is well underway. Over half of Americans over 18 have been fully vaccinated, with two thirds having received their first dose. But vaccinations aren’t the only thing gathering pace, the recovery in the economy is gaining traction too.

The latest figures on inflation from the US Labour department showed a 5% rise in the year to May. A sign of an economy gathering pace.

In reaction to the news, US stocks fell. The US dollar and government bonds rallied as the market fretted about the US Federal Reserve (Fed) tapering down the support it’s giving and raising interest rates earlier than expected. Raising interest rates makes borrowing more expensive which tends to mean people spend less.

Top officials at the Fed, including Chair Jerome Powell, responded by reaffirming the Fed’s belief that the increase we’re seeing in inflation will prove to be short lived. The main takeaway was that there’s some way to go yet before we see any policy tightening.

It’s worth noting that the Fed has altered its inflation target in recent times. It now targets an average inflation figure of 2%, alongside its other objectives. This means it will likely tolerate some periods of higher inflation, if it’s been preceded by a period of low inflation.

However, the Fed did release economic projections, forecasting accelerating economic growth this year. Also highlighting the potential for two rate rises in 2023, a year earlier than previously thought.

In this quarterly sector review, we take a closer look at how different areas of the market have performed, how funds have fared, and share our outlook for the US economy and stock market.

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

Why are investors jittery about when interest rates could rise?

Rising interest rates can put downward pressure on share prices.

A common way to value companies is by taking the present value of future cash flows. This method considers the cash flows expected in the future and discounts them back to today to calculate what they’re worth. In this calculation, the interest rate is often used as the discount rate. And the higher the discount rate, the less future cash flows are worth and the lower the value the investment has today.

It's not all bad news though, if rates are rising it’s likely to be a sign that activity in the economy is picking up and growing. This could mean more employment opportunities if new industries crop up, and improved standards of living.

How has the US stock market performed?

Even with the twists and turns of the last year, all of the major sectors of the US market delivered positive returns over the 12 months to 30 June 2021. Over this period, the Industrials sector of the FTSE USA index delivered the highest return with a gain of 35.0%.

The end of the election uncertainty and the positive news around vaccines supported a brighter outlook for sectors with their fortunes closely tied to those of the economy. We call these ‘cyclical’ sectors. Cyclical sectors, like Industrials and financials, received a boost in the latter months of 2020 after previously being out of favour.

As always, past performance isn't a guide to the future. Just because these areas of the market have performed well in the last year it doesn’t mean this will continue.

Chart showing FTSE USA Annual Performance

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM, to 30/06/2021.

Over the year to 30 June, the average US fund rose 27.8% in value, with the average US smaller companies fund rising 38.8% over the same timeframe.

Despite the progress the US has made, we shouldn’t forget the significant setback seen early last year. While still with us, the virus adds a layer of complexity and unpredictability to markets and investors should still be mindful of these risks.

What has the research team been doing?

We've spent the quarter continuing our deep analysis looking for fund managers with great long-term performance potential investing in the US. 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 Cormac Weldon, manager of Artemis US Smaller Companies over video call. Although the fund gained 37.1% over the past year, it lagged the Russell 2000 index by 6.4%.

The positive news on vaccines in late 2020 meant lots of cyclical companies enjoyed a rebound after previously being out of favour, causing the fund to fall behind its index. The fund does have some investments in cyclical companies, but Weldon decided to maintain a higher quality portfolio rather than further increasing how much they invested in these areas.

We think Weldon is an astute and experienced manager who has delivered strong returns to investors over the long term. We think this fund is a great way to invest in higher risk smaller companies with high growth potential in the US, one of the world's most innovative markets. The fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

How have the US Wealth Shortlist funds performed?

The strongest performer over the past year was the Baillie Gifford American fund which returned 61.9%*. Like lots of other high-performing funds in the recent times, Baillie Gifford American has benefited from being invested in fast growing companies.

We're pleased with the fund's strong performance and to see that it's benefiting from the digital transformation taking place across the economy. The managers believe few companies are capable of delivering exceptional returns over the long run, so they prefer to run a relatively concentrated fund of between 30 and 50 stocks. Our analysis suggests the fund currently has around 4.8% in smaller companies, which are higher-risk. Outperformance on this scale is rare though – it's not a guide to future returns.

The weakest performer of our Wealth Shortlist selections in the North America sector over the past year was the Legal & General US index fund. The fund has delivered a return of 27.1% to investors, compared with 27.1% for the FTSE USA index it tracks.

The fund uses a full replication approach which means it aims to invest in every company in the FTSE USA Index and in the same proportion. Despite this, tracking errors can occur meaning the fund delivers a different return to that of the index. Over the long term, we would expect its return to fall behind the index because of the costs involved in running the strategy, like taxes and dealing charges.

We don't expect all 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 long-term returns.

All investments fall as well as rise in value, so 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.

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.

Annual percentage growth
Jun 16-
Jun 17
Jun 17 -
Jun 18
Jun 18 -
Jun 19
Jun 19 -
Jun 20
Jun 20 -
Jun 21
Artemis US Smaller Companies 31.8% 22.2% 10.4% 7.2% 37.3%
Baillie Gifford American 35.1% 39.5% 11.1% 53.6% 61.9%
Legal & General US Index 22.7% 12.3% 12.0% 9.8% 27.1%
FTSE USA 21.6% 12.7% 14.3% 11.6% 27.1%
IA North America 23.4% 12.3% 11.3% 8.4% 27.8%
Russell 2000 28.2% 15.7% 0.3% -3.8% 44.9%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/06/2021.


Find out more about Artemis US Smaller Companies including charges

Artemis US Smaller Companies Key Investor Information


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


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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