US growth funds show top returns

GDP grew by 4 per cent, compared with a 2.1 per cent contraction previously, but the figures have raised concerns a first interest rate hike could occur sooner than anticipated. In the meantime, with returns of 4.99 per cent and 4.3 per cent respectively, the S&P 500 and the Nasdaq composite indices have outperformed the MSCI World index (3.89 per cent) for the year to date to July 29.

Not all stocks have performed as well, with the Dow Jones Industrial Average index losing 0.28 per cent in 2014, according to FE Analytics’ data.

Peter Rutter, global equity manager at Waverton Investment Management, notes that “attractive investments in the US are increasingly harder to identify”. He says: “On a discounted cash flow basis US markets are at a similar valuation to the period of 2004-07 and some way below the extreme valuations of the dot-com boom. In fact, implied equity market returns are more or less at the midpoint of the extreme exuberance of 2000 and pessimism of early 2009.

“Relative to the rest of the world the US stockmarket is arguably relatively expensive, with an implied long-term real return of 4-4.5 per cent. Mid-cap and growth companies in particular are areas where it is increasingly hard to locate attractively valued investment opportunities. However, the US has some of the strongest underlying fundamentals, perhaps justifying a small premium.”

Angel Agudo, portfolio manager of the Fidelity American Special Situations fund, says that with the macroeconomic environment improving, “valuations at 17 times p/e are exactly where the market should be, and looking at the 15 per cent return on equity, this tells us that the market is operating efficiently”. He adds: “It is true that US post-tax corporate profits as a share of national income is high. Nevertheless, if you exclude globally focused tech and pharma companies – and industrial companies with production facilities in Asia – the number for domestic US firms is within the historical range, albeit at the upper end.”

In terms of individual North American fund performance, more than half of the sector has delivered above-average returns in the past 12 months, according to data from FE Analytics.

The IMA North America sector average return for the period is 6.78 per cent, yet 62 of the 107 funds listed in the sector outperformed this. Mazama Capital’s New Capital US Growth delivered 26.67 per cent. In addition, of the top 10 best-performing funds in the sector for the 12 months to July 29, three have a specific growth focus in the name, and a further two include the term opportunity, suggesting that more unconstrained approaches are outperforming.

Mr Agudo adds: “Following years of cost-cutting, companies are now looking to grow commercial and production capacity through acquisitions. We are probably halfway through the cycle – there is more scope for corporate activity.”

Nyree Stewart is features editor at Investment Adviser