October 1, 2020

The Siren Call of the Greenback

by Dewi John.

COVID-19 has encouraged U.K. assets to travel abroad even as their owners were locked down. North American equities have been a major beneficiary, as I noted in a recent article, and have seen inflows of £6.4bn between January and August.

There is a huge dispersal of returns in the I.A. North American sector year to end-August—from an eye-popping 82.2% at the top end to a jaw-grinding negative 16.8% at the bottom. Nearly a hundred percentage points difference across the piste is quite something over the course of eight short months.

Nearly all the S&P 500’s 12% return year to date has been from a handful of tech stocks. Without their contribution, the U.S.’s large-cap index returns is more or less flat—although “flat” is preferable to the 20% loss that you would have been on the sharp end of if you had invested in a fund tracking the FTSE 100.

Discretion, the Better Part

What characterises all the top-performing North American funds YTD is high allocations to consumer discretionary and IT.

Chart 1: Top-performing North American equity funds, year to date

Source: Refinitiv Lipper

The top fund—Baillie Gifford American—has scooped up more than £2.6bn of U.K. investors’ money on the back of its strong performance. It has a 34% weighting to consumer discretionary. If that conjures up images of shoes and handbags—generally stuff you can pass up on in the midst of a pandemic—remember that Tesla and Amazon are both consumer discretionary stocks.

Tesla is the Baillie fund’s top holding, at more than 10% of the portfolio, having run from third position at 7.1% in April. That isn’t surprising, as Tesla is up nearly 390% over the year till the end of September. Canadian e-commerce company Shopify is up 150%, and Amazon 68%. Together, these three stocks make up more than a quarter of the portfolio.

While investors have every reason to be pleased with the Baillie Gifford fund, those three stocks together represent significant concentration risk—something the company’s risk officers are doubtless reminding the fund manager of on a regular basis. Such concentration likely contributes to the fact that the fund has the highest standard deviation over 12 months to the end of August. Those attractive returns do not come risk free.

IT Crowd

The Morgan Stanley U.S. Advantage fund comes in second YTD with a very respectable 53.4% return. Again, its top three holdings make up more than 20% of the portfolio, with a more than 40% allocation to information technology—considerably higher than the S&P weighting. It has taken in more than £1.5bn of assets so far this year.

Both funds run a low R2, the proportion of a fund’s movement that can be explained by that of its benchmark. That’s neither a good nor bad thing, but it indicates that investors are buying into something that will behave rather differently than the underlying index. The index itself is not, of course, without risk, and can be more volatile than a more concentrated fund invested solely within it.

Interestingly (to me, at least), the seventh-placed Janus Henderson U.S. Forty fund, which more than doubles the S&P’s return, has an R2 of 0.99, along with the lowest one-year volatility in the 10-top funds. Indeed, six of the 10-top funds have R2 of above 0.8, indicating a relatively close correlation with the benchmark, but still achieving returns well in excess.

Quack Like a Duck

None of these factors are intrinsically good or bad: it’s simply down to what degree investors want their U.S. equity duck to walk, swim, and quack like said duck. And, of course, how much volatility they are prepared to countenance in exchange for returns. Which begs the question, how much of the £4bn-plus that’s flooded into the two top performers this year understands the fund managers’ approach, and how much is drawn towards the double-bonus of top-performing managers in an attractive market?

At the other end of the scale, the story is reversed. For example, the bottom two funds are equity income and, as you might expect, given their remit, have a value bias. The largest sector exposure for both is financials, at more than a quarter of the portfolio, as opposed to the weighting in the S&P 500 of about 10%. By way of example, JP Morgan Chase’s stock price is down more than 32% YTD. Goldman Sachs is down 16%, making it almost a U.K.-level basket case, and Morgan Stanley, at a less painful negative 9.2%, are all in the top five holdings of the bottom fund.

Like everywhere else—but more so—the U.S. is strongly divided between value and growth, with the latter strengthening its domination over the past year. The question is, for how long can this run? I’m neither smart enough nor dumb enough to make that call, but pundits have been expecting Apple to fall so long that the story has become associated with a seventeenth-century physicist.

And yet, the stock keeps delivering.


Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.


The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

Get In Touch


We have updated our Privacy Statement. Before you continue, please read our new Privacy Statement and familiarize yourself with the terms.×