Earlier this week, reporter Jean-Baptiste Andrieux asked fund managers whether the US’ dominance over the past decade and the market’s willingness to eschew price and focus on growth potential could continue.
Their answer: yes.
There were a plethora of reasons given, such as that the US is full of tech disruptors who are of higher quality than overseas rivals, make more money and are benefiting from healthier macroeconomics.
Even on valuations the managers were unconcerned. Getting technical, Gerrit Smit, manager of Stonehage Fleming Global Best Ideas Equity, expected earnings growth for the S&P 500 to be close to 10% per year over the next three years.
As such, despite being on higher price-to-earnings ratios, future growth should more than offset this over time.
But this begs the question – why invest in an active fund? According to the latest MSCI World factsheet, the premier global equities index is 70.9% weighted to America.
Yet, if the active managers quoted in the story are correct and the US will continue to drive markets forward, then they will need to be overweight this figure to outperform.
So how can active managers hope to stand a chance against the passive titans? The most common answer is stock selection. Fund managers argue that their research and ability to uncover stocks is better than others and therefore they should have an edge.
Certainly, fund managers can outperform the index by picking good companies either in the US or in other markets, something highlighted by news editor Emma Wallis last week when she looked at the UK stocks able to beat most of the Magnificent Seven.
And there will be more examples in other markets too of individual stocks able to produce the type of returns investors have come to expect from US tech giants.
But the issue is that they are harder to find and – while all fund managers believe in their ability to spot them – few can do so consistently.
Managers often say they do not need to get everything right, they just need to be right more than 50% of the time, which is true, but even this hit rate is difficult when the passive index has been so strong.
Indeed, just 20% of the IA Global sector (52 out of 245 eligible funds) have beaten the MSCI World over the past decade after fees, a figure that drops to 18% over five years and just 13% over three years.
So by suggesting that US exceptionalism can continue over the next decade, active managers have perhaps inadvertently given justification to their greatest rivals – passives.
The most sensible option appears to be basing a portfolio around a global tracker and having other funds at the margins.
However, there are some funds that have an even higher weighting to the world’s largest market than the MSCI World. In the IA Global sector, 46 out of 564 funds are overweight the US, with passives accounting for many of them (particularly the ones that track other, even more US-heavy, indices).
But there are active funds with overweight positions including Smit’s Stonehage Fleming Global Best Ideas Equity fund, which has a 71.7% allocation to the US. The active fund does have the edge on the MSCI World over 10 years after fees, up 249.4% versus the benchmark's 225%, although it has struggled over five and three years.
Whether this is enough to justify spending 0.81% per year in ongoing charges, rather than the 0.12% charged by the cheapest trackers, is up to investors to decide.