Fund Briefing: US Equities

20 June 2017

When you consider the influential position occupied by the United States in global affairs and the number of world-class companies that call it home, it makes sense to consider investing across the pond.


Microsoft, Apple and Google are just a handful of the corporate giants on Wall Street and while other nations, such as China, have grown rapidly over the past decade, the US still has an enviable role to play.

Julian Chillingworth, chief investment officer at investment and wealth management firm Rathbones, believes that every private investor should have some exposure to the US market, with access to the fast-moving world of technology being one of the most important reasons.

“The United States is at the forefront of technological development and that will be key in the future,” he says. “There are also more world-class companies in the US that are global leaders within their sectors than anywhere else.”

However, there are negatives. “The market has already done terribly well and that means valuations aren’t cheap,” he says.

“These issues – as well as the unpredictability of President Donald Trump’s regime – have raised the overall market risk.”

The US election has certainly had a remarkable effect on investors with markets having rallied fairly strongly after the result was announced, points out Adrian Lowcock, investment director at Architas, the multi-manager.

“While some of that was the ‘Trump Bump’ attributed to his pro-business, tax-cutting and infrastructure investment policies, much of it was down to the fact the US economy was growing, interest rates were set to rise and corporate earnings were improving,” he says.

According to Mr Lowcock, President Trump inherited a healthy economy growing slowly but with the most positive outlook since the financial crisis.

“The US is still the world’s largest economy, but its influence has certainly been waning and a more protectionist US policy would suggest its influence might recede further,” he says. “However, whatever the US does, the rest of the world still listens and acts.”

How to choose US funds

Funds focusing on the US are divided into two Investment Association (IA) sectors: IA North America and IA North American Smaller Companies. At the last count there were more than 120 in the first sector and just 14 in the latter, according to data compiled by Morningstar.

Over the past five years, these two have been among the best performing of all the IA sectors with the average fund in each having returned 125% (Source: Morningstar, 2 June 2017).

However, UK investors appear reticent to buy into this sector.

There is £48.4 billion invested in IA North America and £2.3 billion in IA North American Smaller Companies, according to the most recently published data. This compares to £166.4 billion in IA UK All Companies.

Juliet Schooling Latter, research director of Chelsea Financial Services, has her concerns about the US market. While acknowledging the macroeconomic backdrop looks attractive, she warns this doesn’t necessarily translate into a good stock market environment.

“Negative newsflow could also see a correction, and there is certainly more room to fall than rise in my opinion,” she says. “Even if the market does continue its rise, investors should be prepared for lower returns than they have become used to in the past couple of years.”

She also points out that it’s notoriously difficult for fund managers to outperform the US market, as measured by the S&P 500 index or Dow Jones index, because so many of its companies are multinational giants whose moves are constantly under the spotlight.

“It’s full of very large companies that have many analysts following them,” she says.

“With so much good information around, it’s hard to get an edge and find something that everyone else has missed that could materially impact the share price of the stock.”

She also points out that the investment culture in the US is very different to the UK, with a much larger portion of the population investing, which means funds tend to get very large and end up being closet trackers.

“Managers in this area need to have a fund that is very different to the benchmark index to outperform,” she explains. “Those who do outperform also tend to invest in medium and smaller companies where they can actually fi nd some hidden gems.”

It’s also worth remembering that due to the size of its economy, many smaller US companies would be considered medium sized or even large companies if they were based in different countries, points out Patrick Connolly, a certified financial planner with Chase de Vere.

“Most investors should focus their exposure on large companies, although having some allocation to smaller companies can diversify risks and increase growth potential,” he says. “Many broad-based US funds might already include both larger and smaller companies.”

Mr Connolly points out that the difficulties many US fund managers encounter trying to outperform the market mean investors need to consider whether it’s worth paying extra for active management.

“There is a strong argument for using low-cost passive funds such as trackers to invest in US shares as it has been shown over many years that it is incredibly diffi cult for active fund managers to outperform in this market,” he says.

Fund briefing: US Equities

Fund to watch: Legal & General US Index Trust

The objective of this fund, which will invest almost entirely in company shares, is to provide growth by tracking the performance of the FTSE USA Index. The idea is to closely match it with the stocks making up the index.

The idea of tracking this index is to provide investors with a return that closely follows the performance of the market. This means they will benefit if it rises, but also run the risk of losses if it takes a tumble.

While this passive approach means they won’t enjoy stellar outperformance enjoyed when active managers make the right calls, it also helps guard against horrendous losses should they get things wrong.

Just over half of the fund (54%) is in large companies with market capitalisations of greater than £50 billion, while just over a fifth is in companies of £20 billion to £50 billion, and a further 12% in those valued at between £10 billion and £20 billion.

As far as sector exposure is concerned, technology has the lion’s share of assets with a 19% exposure, followed by 18% in financials, 13% in consumer services, 12% in health care, 11% in industrials and 10% in consumer goods.

The other sectors represented, which each account for less than 10%, are oil and gas, utilities, telecommunications and basic materials.

Fund briefing: US Equities


Is this area right for me?

Consider investing in US equity funds if…

  • You want focused exposure to US-based companies
  • You believe there is still value to be had from US companies
  • You believe the outlook for the US is positive

How much should I invest in this sector?

  • Low-risk investors: 10%
  • Medium-risk investors: 15%
  • High-risk investors: 20%

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