It is a commonly held view that investors who want exposure to North America might as well buy an S&P 500 tracker because active fund managers fail to add value and consistently underperform the index.
The fact that the US stock market is so well analysed has made it hard for managers to add value. Compliance restrictions and the fear of straying too far away from the index haven’t helped matters.
According to FE Analytics, the average fund in the sector has underperformed against the S&P 500 by a sizeable distance over one, three, five, seven and 10 year periods.
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 02014_Article_charts_&graphics/20140916_US_1.png)
Source: FE Analytics
When you drill down a little further, the impression is even worse for active managers.
While not every fund in IMA North America measures itself against the S&P 500, this is the natural benchmark for the sector rather like the FTSE All Share is for IMA UK All Companies.
Our data shows that just 27.4 per cent have beaten the index over one year, 37.3 per cent over three years, 25.5 per cent over five years, 34.6 per cent over seven years and 36.7 per cent over 10 years.
It is a similar story on a year-by-year basis as well.
Our data shows that there are 55 funds in the sector that have a track record spanning back to January 2004. Between 2004 and 2013, no funds in the sector managed to outperform more than seven out of eight calendar years; a far cry from the IMA UK All Companies sector, as a recent FE Trustnet study recently highlighted.
Only three have outperformed in seven of the last 10 calendar years; Ian Heslop’s Old Mutual North American Equity fund, the £221m Schroder QEP US Core fund and FE Alpha Manager Jenny Jones’ Schroder US Mid Cap fund; though as the latter’s name suggests, it largely invests outside of the S&P 500.
FE data shows that only 23.6 per cent of IMA North America funds have beaten the index in at least six of the last 10 calendar years, while 47.27 per cent have outperformed in at the least five of the last 10 years.
The worst performing portfolios, on a discrete annual basis, have been Halifax North American Growth, Kames American Equity, Legg Mason Clearbridge Growth and Scot Wid American Growth. All four have underperformed in eight of the last 10 years.
It is a slightly different outcome when you look over the last five years, however.
One fund that is certainly worthy of a mention is CF Greenwich Sterling, which was the only fund in the sector to beat the S&P 500 in 2009, 2010, 2011, 2012 and 2013. Again it’s a mid-cap fund and isn’t readily available to retail investors.
Consistency isn’t everything of course, and there are some funds that have performed well on a cumulative point of view. Again, they are few and far between.
As well as the aforementioned Old Mutual North American Equity fund, which has beaten the index over one, three, five, seven and 10 year periods, Felix Wintle’s Neptune US Opportunities fund has been the sector’s best performing portfolio over 10 years with returns of 210.85 per cent, beating its S&P 500 benchmark by close to 90 percentage points.
Performance of fund versus sector and index over 10yrs
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 02014_Article_charts_&graphics/20140916_US_2.png)
Source: FE Analytics
Much of this outperformance came in the first five years, however.
There have also been periods where investors have been rewarded for using active managers in the US. One example was in the rebound year of 2009, when 88.5 per cent of funds in the sector beat the S&P 500’s return of 11.78 per cent.
Performance of sector and index in 2009
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 02014_Article_charts_&graphics/20140916_US_3.png)
Source: FE Analytics
The likes of Janus Opportunistic Alpha, T Rowe Price US Large Cap Growth, UBS US Growth and M&G North American Value returned more than 30 per cent that year over the 12 month period.
However, given that it was a period of recovery after the worst financial crash since 1929, those active managers will have no doubt benefitted from ignoring the largest, most liquid and least risky companies that held up better than in 2008 and buying bombed out stocks instead.
In more difficult markets, such as 2011 when the index returned 2.23 per cent, only 18.2 per cent of funds outperformed.
Performance of sector versus index in 2011
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 02014_Article_charts_&graphics/20140916_US_4.png)
Source: FE Analytics
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/People/S/Scott_Richard_large1.jpg)
He says that the recent poor performance of active managers has largely been down to the fact that the largest constituents of the index, such as Apple, have performed so well recent years. Even a small underweight has cost fund managers dearly, he points out.
Instead of going passive, however, Scott likes to use more specialist vehicles for his exposure.
“There is an argument, although difficult to prove, that the US market is very efficient and it is therefore harder for active managers,” Scott said.
“Because of that, I think it does pay to use really specialist managers. For instance, we are big on healthcare, which makes up a large part of the US index. We would prefer to use a manager who has a deep understanding of the industry instead of trusting a more general manager.”
Though active funds in the US haven’t performed well over recent years, a number of experts are starting to change their opinions on them.
The likes of Psigma’s Tom Becket, Margett’s Toby Ricketts and FE Alpha Manager David Coombs have all started advocating the use of active managers in the US.
They argue that the market is less macro-driven than it has been in the past and because the index is expensive, companies with good earnings are being rewarded while those that have a bad reporting season are being punished; all of which are creating opportunities for fund managers.
There are signs that this is already happening; our data shows that close to 60 per cent of active funds in the sector have beaten the S&P 500 so far in 2014. Scott agrees with this assumption and says he may start to use active managers in the future.