Solid returns have been witnessed across the board within the North America sector, but only time will tell whether or not the growth enjoyed by investors can continue
The American Dream is the long talked about ethos of the United States; the dream of opportunity for prosperity and success. But is this the case for funds in the North America sector?
The US is an incredibly different market to the UK, so it is hard to directly compare. The primary reason for this is due to the fact that everything is on a much larger scale across the pond.
What would be considered a small-cap in the US could easily be classed as large-cap in the UK.
For example, the largest company by market capitalisation in the FTSE 100 index is HSBC, which currently stands at £125bn. Compare that with the world’s largest company, which sits in the S&P 500, Apple. The tech company was the first to hit the $1trn (£780bn) mark and stands at $1.04trn as at time of press – around 8.5 times the size of HSBC.
This sector has been historically unpopular with investors because it tended to be more expensive than its British counterparts. But things have changed in recent years, as the North America sector is now the sixth largest in terms of funds under management. According to the Investment Association, the sector has £63bn. North American funds have seen many ups and downs in the past year when it comes to sales.
June figures from the IA show net retail sales in the sector hit £248m, then a month later outflows of £293m were seen. August figures show that interest in the funds seemed to be rising again, with £62m of inflows. Funds have also been popular with Isa investors, the August data shows. This was the fifth highest sold sector for Isa sales on the five platforms the IA uses to collate data (Aegon, Fidelity, Hargreaves Lansdown, Quilter and Transact), with flows reaching £19.3m for the month.
The fluctuation in sales could be down to coincidence or to scepticism that the good times will not last. US equities buoyed in the summer, with a minor sell-off at the start of August. Of the S&P 500 firms which reported earnings to the beginning of August, 86 per cent beat their estimates, according to Schroders data.
Key economic indicators for the region are still encouraging. For example, the unemployment rate declined to 3.7 per cent, its lowest since 1969. The Federal Reserve also raised short-term interest rates for the eighth time since 2015 to a range of 2 per cent to 2.25 per cent, while indicating that further increases would be consistent with “sustained expansion of economic activity”.
The IA requires funds to have 80 per cent in equities in stocks based in the US or Canada. According to the MSCI North America index (funds are not tied to the index, it is instead used as a benchmark for the IA), 94.9 per cent of stocks are based in the US, while just 5.1 per cent are in Canada. So the majority of funds are US-focused but may have a few Canadian holdings.
Politically, all eyes are on Congress as the midterm elections approach next Tuesday (6 November). People will be voting to elect members of both the House of Representatives and the Senate. The outcome may give some insight into what could happen in two years’ time at the next presidential election.
Taking an overall look at performance, it is clear why North American funds could be an easy sell for advisers. Over the past five years as at 22 October, the sector on average returned 91.9 per cent, an annualised return of 13.9 per cent.
In money terms, if an investor had put £100 into an average fund, they would have almost doubled their money, now having £191.94 after five years.
The top performer over both three and five years is the Baillie Gifford American fund. Over a five-year period, it saw returns of 163.3 per cent – giving the investor £263.25 back on their original investment. Whether or not funds can sustain such performance in uncertain times ahead remains to be seen, but for now performance speaks for itself.
Funds in focus: Looking beneath the surface
The North America sector is relatively large, with 150 constituents from 83 fund providers. It ranges from large-cap focused funds to small-caps, as well as actively managed funds and trackers. All funds will have a minimum 80 per cent equity holding but how they manage it differs completely, despite it looking at first glance that they all hold Amazon, Facebook, Alphabet and Microsoft. Looking beneath the top five holdings tells a different story for each fund.
Here is a closer look at a selection of funds from the sector.
Largest fund: Royal London US Tracker
Launch date: 24 August 2007
Manager: Symon Bradford
Fund size: £5.7bn
Fund objective: The fund aims to achieve the capital return of the FTSE World US index. It invests primarily in securities that make up the index and by being a tracker fund, aims to be competitively priced and offer a low-cost index tracking solution. RLAM’s view is that full index replication could result in too much costly trading which might outweigh the benefit of a perfect replication, so it uses an optimised portfolio.
Asset split: Perhaps unsurprisingly, the fund’s largest holdings are in technology (Apple, Microsoft and Facebook make appearances in the top 10), accounting for 22 per cent. The fund has 18 per cent in financials – 1 per cent is in Berkshire Hathaway, Warren Buffett’s conglomerate based in Nebraska.
Important charges: Keeping to a true tracker nature, this fund barely carries any fees. There is no initial charge for the fund, nor is there an annual charge for the retail share class (the Z class carries a 0.2 per cent charge but comes with a higher initial investment). There is also no ongoing charges figure for the retail share, but the Z class comes with a 0.23 per cent fee.
Top performer over five years: Baillie Gifford American
Launch date: 28 March 2002
Managers: Gary Robinson, Helen Xiong, Tom Slater and Kirsty Gibson
Fund size: £1.7bn
Fund objective: A bottom-up strategy with a long-term horizon, this fund has a concentrated portfolio with between 30 and 50 stocks with low turnover. The team takes a five-year view and states it is not driven by short-term trends.
Asset split: A common theme for North American funds is technology having the top sector weighting. This fund carries 28.6 per cent in the space, with consumer products and healthcare close behind, at 28.1 per cent and 20 per cent respectively. The fund cites Amazon, Netflix, Tesla and Alphabet among its top 10, but also stocks perhaps less well known to UK investors, including Grubhub, a food delivery service, and Abiomed, a manufacturer of medical implant devices.
Important charges: The A share class carries a £1,000 minimum investment as standard with no initial charge, 1.5 per cent annual management charge and 1.53 per cent OCF.
Longest running fund: Scottish Widows American Growth
Launch date: 30 November 1979
Manager: Quantitative investment team and Nick Millington
Fund size: £607.5m
Fund objective: By investing in S&P 500 companies, the fund looks to deliver performance (before deduction of fees) in excess of the index, with a similar level of volatility. It will only take positions away from the index for a “limited” period.
Asset split: Apple, Microsoft, Amazon and Visa are the dominating names on the holdings list. With 25.4 per cent in tech stocks, the fund is a “typical” North American fund, with financials and healthcare the next common sectors.
Important charges: The fund’s underlying assets and strategy resemble a tracker fund, although the charges do not reflect that. The A share class of the fund has a £1,000 minimum investment then a 5 per cent initial charge, 1.35 per cent AMC and 1.47 per cent OCF.
Highest AMC: Brown Advisory US Flexible Equity
Launch date: 7 March 2014
Manager: R Hutchings Vernon and Maneesh Bajaj
Fund size: $371m (£289.8m)
Fund objective: This fund uses anything from large-cap to small-cap stocks, and looks at growth and value stocks. The managers believe this strategy casts a wide net for strong businesses with shareholder-oriented management teams and potential to outperform more constrained strategies. The fund stands out as it is one of the few in the sector to have a US-based manager.
Asset split: Top holdings sit within technology and financials, but consumer discretionary and communication services also play a part. Companies such as home improvement store Lowe’s and car retailer CarMax feature in the fund’s top 10 holdings.
Important charges: The AMC sits at 1.5 per cent for the A share class so, while the highest in the sector, still not an earth-shattering amount. The OCF is 1.66 per cent but there is no initial charge.
Most volatile over five years: GAM Health Innovation Equity
Launch date: 31 January 2008
Manager: Christophe Eggmann
Fund size: $222.3m (£173m)
Fund objective: This Luxembourg-domiciled Sicav looks to invest long-term in innovation-driven companies in healthcare and its sub-sectors, including pharmaceuticals, biotechnology, medical technology and healthcare supplies.
Asset split: TThe fund has 83.5 per cent in US equities, just over the 80 per cent minimum required by the Investment Association. It owns well-known stocks, including pharma giant Pfizer and Johnson & Johnson, as well as perhaps lesser-known companies, including antiviral drug developers Gilead Sciences and Bristol-Myers Squibb, and healthcare provider UnitedHealth Group.
Important charges: The retail share class AMC is 0.85 per cent, with an OCF of 1.2 per cent.