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US funds sector review – stimulus, vaccines and the road to recovery

With a $1.9trn stimulus package on the way, 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.

In recent weeks the vaccination drive in the US has ramped up significantly. At the time of writing over 100m doses have been administered, with 35m people (around 13.5% of the US population) having been fully vaccinated.

The way the country's governed means coronavirus restrictions can differ across states. For example Greg Abbott, Governor of Texas, recently relaxed various restrictions in the state, including having to wear masks. Of course in lots of other states that's not the case, you still have to wear masks along with following other restrictions.

Some see these more relaxed approaches as a sign of optimism and that the virus is under control locally. But for many it's premature, especially given how quickly the virus can re-emerge – some countries across central Europe are once again battling a rising number of cases.

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 if an investment is right for you, ask for financial advice. Investments rise and fall in value, so you could get back less than you invest.

How has the US stock market performed?

The shock to the US stock market from the pandemic was relatively sharp. All of the sectors in the chart below were in negative territory at the end of March 2020.

As the year progressed though, some areas did better than others as the impact of government restrictions on different businesses became clearer.

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 28/02/2021.

Even with the impact of the coronavirus on share prices, all of the sectors of the US market delivered positive returns over the 12 months to 28 February 2021.

The technology sector grew faster than any other as people turned to tech to help them work from home and keep them entertained during lockdown. The sector's march upwards stalled as we entered 2021 though and has given a little of this ground back as other sectors like industrials, oil & gas and financials have performed better.

Sentiment towards these businesses has improved as hopes of the economy reopening and a return to normality grow. As always, past performance isn't a guide to the future.

What's been going on with tech stocks?

After a stellar year, this quarter saw the value of some technology stocks take a hit. Prices fell as concerns about the potential for higher inflation and rising interest rates heightened.

While inflation can be good for stock markets – it normally means the economy is growing – too much of it can also be an investor's nemesis. If it gets too high, the US Federal Reserve might raise interest rates to make borrowing more expensive – this helps reduce the overall level of spending in the economy. It can have other implications though.

If interest rates rise, it affects the discount rate used in lots of valuation calculations.

One common way to value investments is to calculate the present value of future cash flows. This method considers the cash flows an investor expects to receive in the future and discounts them back to today. In this calculation, the interest rate is often used as the discount rate. And the lower the discount rate, the more future cash flows are worth and the higher value the investment has today.

Jerome Powell, the Chairman of the US Federal Reserve looked to calm the volatility though, emphasising that there were no immediate plans to adjust monetary policy.

The economic recovery

With household consumption making up around 70% of the US economy, US consumer spending will be key to any recovery in the economy. Some of those still employed might have managed to build their savings pot over the course of the pandemic so far. But last month, the US economy had 9.5m fewer jobs than a year earlier. This is a significant number and is likely to take some time to recover.

President Joe Biden has signalled his desire to “act big” to get the economy moving. A substantial $1.9trn stimulus package is set to put money into the pockets of most Americans.

The ‘American Recovery Plan Act' includes $1,400 payments to qualifying Americans, as well as an extension to jobless benefits and child tax credits. It also includes a sizeable $350bn boost to the coffers of state and local governments.

It's possible we could see this injection of money into the economy boost asset prices in times to come.

In the short term, the US stock market is likely to remain sensitive to Covid-19 news flow. Investors will want to see vaccines being rolled out effectively and new infection rates falling across the country.

Looking to the longer term though, we think the US is home to lots of world-leading businesses that are among the most innovative around. This means they offer lots of growth potential. We think the US should have a place in most well diversified portfolios.

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 24.2%* compared with 26.7% 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 to measure performance, and past performance isn't a guide to the future.

Annual percentage growth
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Feb 20 -
Feb 21
Baillie Gifford American 39.5% 26.9% 19.8% 13.7% 119.0%
FTSE USA 39.3% 7.4% 7.0% 9.3% 26.7%
IA North America 37.6% 5.1% 7.1% 8.7% 24.2%

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2021.

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 don't think there are 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.

The fund has experienced a fairly volatile start to 2021. Performance initially continued in a similar vein to how it performed last year. In recent weeks it's fallen in value though, partly due to weakness in the technology sector as mentioned above.

The managers aim to buy businesses with strong growth prospects and hold them for long enough to reap the rewards, aiming to outperform the S&P500 over any five-year period. Our analysis suggests the fund currently has around 10% in smaller companies, which are higher-risk.

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 the index fund management team at Legal & General about the Legal & General US Index fund.

The fund tracks the performance of a basket of companies, as measured by the FTSE USA Index. It's currently made up of around 580 companies and offers investors a broad exposure to the US market.

The fund aims to invest in every company in the FTSE USA Index and in the same proportion. This is known as full replication and helps to closely match the performance of the index. The fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

How have our Wealth Shortlist funds performed?

The strongest performer over the past year was the Baillie Gifford American fund which has returned 119.0%*. Like lots of other high-performing funds in the last year, 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 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.

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 26.3% to investors, compared with 26.7% for the FTSE USA index it tracks. This is a relatively small tracking error and we would expect its return to fall behind that of the index over time. That's because of the costs involved in running the strategy, like taxes and dealing charges.

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 long-term returns.

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
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Feb 20 -
Feb 21
Baillie Gifford American 39.5% 26.9% 19.8% 13.7% 119.0%
Legal & General US index 38.6% 6.9% 6.8% 8.5% 26.3%
FTSE USA 39.3% 7.4% 7.0% 9.3% 26.7%
IA North America 37.60% 5.1% 7.1% 8.7% 24.2%

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2021.

Annual percentage growth
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Feb 20 -
Feb 21
Artemis US Smaller Companies 47.5% 4.1% 18.7% 7.2% 39.1%
Legg Mason IF Royce US Smaller Companies 45.5% -2.1% 5.8% -0.78% 35.7%
Russell 2000 52.4% -0.2% 9.4% -1.0% 38.0%
IA North American Smaller Companies 46.7% 1.1% 11.2% 3.7% 38.6%

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2021.

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


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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