Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA North America sector.
The US equity market has been much in focus over the past year as the S&P 500 giants of the Magnificent Seven reversed their precipitous declines of 2022. When we looked at the sector 12 months ago, everyone (not least me) was pessimistic about the US as recessionary clouds gathered over the world’s largest economy. Well, that’s clearly not happened, so I will accept my slice of humble American pie.
Exactly why the US has avoided the anticipated downturn is not altogether clear, but the deep pockets of the US consumer likely have something to do with it, as they have continued to spend over the course of the year. That said, the data indicates that this post-pandemic spree has largely tapped out. It’s possible that other impulses will pick up the baton, for instance the pump priming of President Biden’s Inflation Reduction Act (IRA). What’s more, research has demonstrated that US stock prices tend to outperform in the year prior to an election, as the White House incumbent for the current term attempts to weigh the scales in favour of him continuing to be the incumbent for the next.
None of which is a slam dunk in favour of US equities since there are any number of things that can upset the applecart in this febrile environment, from the percolating effects of higher rates to geopolitical crises. Whatever the outcome, UK investors have ignored the naysayers over the year to November, putting £1.2bn into the IA sector.
This time last year, eight out of the top 10 performers over three years were index trackers. The top performer was an energy ETF in which oil & gas stocks Exxon Mobil and Chevron together made up more than 40% of the fund. Indeed, this is still the case, with the SPDR S&P US Energy Select Sector UCITS ETF Acc returning 173% over three years—more than treble the next fund.
What’s noteworthy is that, despite how the Magnificent Seven stocks have driven US equity market returns over 2023, this doesn’t characterise the top-performing funds over three years. Indeed, there’s only one significant growth-tilted fund in the table, the Xtrackers MSCI USA Information Tech UCITS ETF, which retains its place from last year. That said, the table looks very different when run over 12 months, when funds dominated by such large-cap growth stocks make the running. Plus, analysis suggests that the Magnificent Seven may have more in the tank. According to analyst estimates, they are expected to significantly outperform the broader index for the next several quarters on a year-over-year basis, with strong earnings and revenue growth.
Interesting to note, also, the presence of the Invesco FTSE RAFI US 1000 UCITS ETF at number 10, as its UK stablemate was second-placed over three years when we looked at UK All Companies last month. Both funds track an index whose constituents are weighted using a composite of fundamental factors, including total cash dividends, free cash flow, total sales, and book equity value. It’s clearly a style that’s working in this climate on either side of the pond.
What, then, of the coming year? If the “higher for longer” rate consensus is correct, this would continue to favour larger businesses. This being the case, funds characterised by value-exposed businesses—or at least low gearing—may be best positioned to deliver. But, as ever, it’s an “if”: central banks got inflation wrong on the way up, and they may do so on the way down. Much of what drove inflation was the emergence of supply chain disruptions added to, at least early on, the post-COVID rebound of consumer spending. Despite deglobalisation and stimuli such as the IRA, these have abated, and it’s worth considering that inflation may surprise both on the way up and on the way down. Although, given how the past 12 months have panned out relative to expectations, it clearly pays to keep one’s expectations under review.
Table 1: Top-Performing North America Over Three Years (with a minimum five-year history)
All data as of November 30, 2023; Calculations in GBP
Source: LSEG Lipper
This article first appeared in the December edition of Moneyfacts (p13)
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The views expressed are the views of the author and not necessarily those of LSEG Lipper. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper 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.
