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US funds sector review – Omicron raises the stakes for policymakers

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 new Omicron variant and the surge in Covid-19 cases across the US has thrown a spanner in the works of the economic recovery. Scientists are still trying to understand more about Omicron’s transmissibility, and how resistant it is to the vaccines.

This development is also likely to raise the stakes for policymakers. At the US Federal Reserve – the country’s central bank – Jerome Powell has been reappointed as Chairman for a four-year term. The pressure on Powell is high with his every word being scrutinised.

US consumer price index (CPI) inflation hit 6.8% in November, the highest level since 1982 – well in excess of the 2% average annual inflation target. But any rate rises and the planned reduction in monthly bond purchases from $120 billion to zero by the end of mid 2022 could be under threat from Omicron.

Joe Biden is also trying to kickstart both his presidency and the economy, signing the $1.2tn Infrastructure Investment and Jobs Act into law. The bipartisan bill devotes a significant resource towards upgrading transportation infrastructure in the country. The drive to get the unemployment rate down is also having an effect. US employers hired 210,000 more workers in November, enough to see the unemployment rate drop to 4.2%, from 4.6% in October. Although it’s worth noting that this isn’t the same across all sectors of the economy. Employment in leisure and hospitality only rose by 23,000 and remains around 8% lower than before Covid-19 hit.

The inflationary threat

Inflation is unsettling because it can erode a company’s profits and, ultimately, investor returns.

This is why fund managers we’ve been speaking to in the sector have been re-examining the pricing power of the companies they invest in.

Pricing power allows companies to deal with higher costs to provide their service or product by charging customers a higher price, therefore protecting their profit margins. For example, most people are happy to fork out for the latest smart phone, no matter the cost. Some of the strongest businesses are able to do this without losing customers, leaving them less vulnerable to the bottlenecks and supply chain issues we’re seeing in parts of the economy.

A healthy US consumer?

Normally after a big recession or economic shock, consumers end up worse off, but on the whole Covid-19 has been different economically.

Since the start of the pandemic, US household net worth in total has grown by 22%. It’s not just higher income households that have benefited either. The restricted ability to spend, coupled with government transfer payments, has resulted in more savings in people’s pockets – something not just seen in America. As restrictions and the threat posed by the virus hopefully recedes over time, this wall of savings could help boost the wider economy.

Of course, not everyone is better off. Unfortunately lots of American workers have lost their jobs. Unsurprisingly the majority of these job losses have been in industries affected most by Covid-19, but this does give hope for a faster pace of job creation as the economy eventually returns to normal.

How have the US Wealth Shortlist funds performed?

The strongest performer out of our Wealth Shortlist selections in the North America sector over the last year was Legal & General US Index, gaining 28.19%*. This was marginally ahead of the FTSE USA index which returned 27.95%.

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 the index. Over the long term, we would expect its return to fall behind the index rather than be ahead because of the costs involved in running the strategy, like taxes and dealing charges.

The weakest performer of our Wealth Shortlist selections in the North America sector over the past year was the Baillie Gifford American fund. The fund has delivered a return of 14.55%, behind the IA North America peer group average of 25.38%.

Some of the fund’s investments in companies that did very well as a result of the pandemic have been more of a drag on performance in the last 12 months. The weakest performers over this period were Zoom Video Communications and e-learning platform Chegg.

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.

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
Nov 16 -
Nov 17
Nov 17 -
Nov 18
Nov 18 -
Nov 19
Nov 19 -
Nov 20
Nov 20 -
Nov 21
Baillie Gifford American 23.29% 27.17% 16.48% 110.51% 14.55%
IA North America 11.61% 10.09% 13.41% 14.67% 25.38%
Legal & General US Index 11.96% 11.57% 15.44% 14.88% 28.19%
FTSE USA 13.53% 12.60% 14.69% 15.91% 27.95%

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2021

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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