With the US equities amounting to over 33.6% of the world’s stock market capitalisation (as of 10 September 2012), it is not surprising that US equity funds are fairly well-represented on the platform, with 16 funds invested principally in US equities currently available on the platform (including different currency classes and alternative investment strategies). US equities have had a strong year so far, with the S&P 500 delivering a 9.9% year-to-date return for investors (as of 10 September 2012, in SGD terms including dividends), and investors may be curious to find out how US equity funds on the platform have fared this year. In this article, we examine three of the best-performing US equity funds available on the platform so far this year.
Table 1: YTD performance of selected US equity funds
|Source: iFAST compilations; returns in SGD and include dividends
Legg Mason Capital Management Opportunity Fund
Topping the list so far this year is the Legg Mason CM Opps Fund A Acc USD, which is a fund which aims to mirror the performance of the US-based Legg Mason Capital Management Opportunities Trust, managed by legendary value investor Bill Miller. In contrast to another US equity offering by Legg Mason, the Legg Mason CM Val Fd Cl A Acc-S$ which is biased towards large-cap value stocks, the Legg Mason CM Opps Fund A Acc USD has a fairly flexible investment mandate, which allows the manager to invest in off-benchmark smaller-capitalisation stocks, as well as take short positions via derivatives.
The alpha-seeking high-conviction approach of the fund (the fund held just 45 stocks as of 31 July 2012) has meant that returns have deviated significantly from the S&P 500 while performance volatility has also been high. Nevertheless, we note that investors in the fund have been rewarded this year with an eye-popping 19% year-to-date return (in SGD terms, including dividends), significantly outperforming the S&P 500’s 9.9% return over the same period. We note that the manager’s large allocations to homebuilder stocks at the beginning of the year have aided returns (the S&P 500 Homebuilders index has delivered a hefty 71% year-to-date return, as of 10 September 2012), while the fund’s three largest sector allocations at the start of the year (financials, consumer discretionary and information technology) were among the best-performing sectors of the US market so far this year.
As of 31 July 2012, the fund still maintains a fairly large allocation to financial stocks (32.07% of the portfolio) and the consumer discretionary sector (25.45%), while the fund’s two largest holdings are Pulte Homes Inc. and Lennar Corp, suggesting that the manager still remains positive on the ongoing recovery in the US housing market (see “How This Overlooked Sector Can Double US GDP Growth (Part 2)“). The fund will be suitable for investors seeking high-conviction, actively-managed US equity exposure, but investors should be aware that the fund’s returns will likely be more volatile compared to a more diversified US equity fund.
Legg Mason Royce US Small Cap Opportunity Fund
The Legg Mason Royce US Sm Cap Opp A USD is managed by Royce & Associates, a wholly-owned subsidiary of Legg Mason which specialises in managing small- and micro-cap value portfolios. While managed against the smaller-capitalisation Russell 2000 index (as opposed to the large-cap S&P 500), the fund has also outperformed the market, delivering a 10.5% year-to-date return (as of 10 September 2012, in SGD terms), ahead of the Russell 2000’s 9.7% return.
The Legg Mason Royce US Sm Cap Opp A USD focuses on micro- and small-cap US companies, which the managers define as having a market capitalisation of less than USD 2.5 billion. While the managers utilise a value-based bottom-up approach to stock picking, the less-efficient nature of the small-capitalisation space allows the managers to invest along the lines of “special-situations” – situations where the managers can see a clear catalyst to drive stock performance like temporarily suppressed earnings or a turnaround due to corporate restructuring. As part of a prudent approach to risk management, the fund is highly diversified, with 273 holdings as of 31 July 2012. The managers have guided for each position to constitute about 0.35% to 0.5% of the portfolio at the time of purchase, and will look to cut back on positions when they reach 1% of portfolio assets – a check against the largest holdings reported on the fund’s latest factsheet (as of 31 July 2012) confirms that the managers have kept positions below this 1% guideline limit.
Investors may like the managers’ value-based approach to investing in the less-efficient segments (small- and micro-caps) of the US market, which can offer strong opportunities to generate alpha. We also note that the highly-diversified nature of the fund will mitigate company-specific risks in the portfolio. Nevertheless, small- and micro-cap stocks can be rather volatile, and investors would be advised to fit the fund in the supplementary portion of their portfolio, or to use it as a complement for their existing larger-cap US equity exposure.
Fidelity America Fund
The Fidelity America A USD is a recommended US equity fund (see The 2012 Recommended Funds List - Now Available!), and the fund’s strong track record has continued into 2012, with a 10.3% year-to-date return marginally outpacing the S&P 500’s 9.9% return over the same period (as of 10 September 2012, in SGD terms including dividends).
The fund’s strengths are in its fairly consistent long-term returns, and unlike the Legg Mason CM Opps Fund A Acc USD and Legg Mason Royce US Sm Cap Opp A USD, is a more traditional long-only US equity fund which focuses on larger capitalisation US stocks. We note that the manager has traditionally adhered to active weight guidelines with respect to the fund’s benchmark (the S&P 500), which has usually resulted in returns which are fairly close to the benchmark. Nevertheless, investors should note that the fund is actively-managed, which has helped it beat the benchmark so far in 2012. As of 31 July 2012, the fund was overweight Information Technology, Health Care, Consumer Discretionary and Consumer Staples, while underweight Financials, Industrials, Energy and Materials. Some of the fund’s largest holdings include Microsoft, Google and Apple, which are also some of the largest companies (by market capitalisation) within the S&P 500.
The fund is recommended for investors who want broad-based diversified exposure to the US equity market (the fund tends to hold between 80 and 120 stocks at each time), and are seeking returns which are more aligned with the benchmark S&P 500 index. Investors who have a view that the USD will depreciate against the SGD over the longer-term may wish to consider the Fidelity America A SGD Hedged, which has a currency-overlay and would be expected to outperform the un-hedged class should the USD depreciate against the SGD (the SGD-hedged class has outperformed the un-hedged class so far this year, as the SGD has appreciated against the USD). However, should the USD appreciate against the SGD instead, the SGD-hedged class would likely underperform.
A Note on the Aberdeen American Opportunities Fund
Chart 1: year-to-date performance
Investors may point out that the Aberdeen American Opp has fared rather well in 2012, delivering a 16.8% return on a year-to-date basis. Astute investors will note that on 18 July 2012, the fund’s NAV jumped by a hefty 11.5% (see Chart 1), which was due to a one-off injection of money into the fund following the settlement of class action claims initiated many years ago. Since the S&P 500 delivered a return of just 0.4% on 18 July 2012, it would thus be logical to conclude that the bulk of the fund’s 11.5% return (on 18 July 2012) should be attributed to this one-off injection of money; excluding this event, the fund’s year-to-date performance (attributed to the fund manager) would be significantly less than 16.8%.