Fangs’ dominance may prove a 2015 story

In other words, there was a distinct set of winners and losers last year, and as experienced investors will know, picking the winners – or at least avoiding the losers – is tricky.

Felix Wintle, head of US equities at Neptune Investment Management, explains: “Obviously we’ve now had the first [interest rate] raise but because you had interest rate rises coming, and you have what we believe is quite a long-term bear market in commodities, that spells disaster for certain companies – but the opposite for other companies.”

He illustrates this by pointing out that if the 10 largest companies in the S&P 500 were in an index of their own it would have been up 17 per cent in 2015.

Mr Wintle suggests that perhaps questions are being asked about whether investors’ reliance for returns on a small number of stocks reflects a healthy stockmarket, but he retains an optimistic stance.

He notes: “It’s very easy to think the breadth is so narrow that it must portend some doom. I’m not so sure about that.

“The sectors that are underperforming, like energy and materials, ought to be underperforming because the fundamentals are so bad. The sectors that are outperforming ought to be outperforming because the fundamentals are so good. I don’t think people are panicking into these names, they’re going up for very fundamentally sound reasons.”

As a group, the Fangs posted revenue growth of 25 per cent in 2015 against price appreciation of 83 per cent, according to Steven Bulko, chief investment officer, LO Funds Fundamental Equity Long/Short fund.

He asserts: “We believe the Fang names that provide accelerated growth will continue to attract investor interest and work into 2016, but with a broadening of participation as investors look outside this small group for additional winners. Despite the rising interest-rate environment, we anticipate that higher-multiple, faster-growing companies with improving margins will outperform.”

Chris Berrier, manager of the Brown Advisory US Smaller Companies fund, provides further reassurance that domination by the Fangs is not bad for investors.

“It is not abnormal for a handful of stocks to contribute a sizeable portion of overall positive returns. The Fang acronym and the common bond of being internet leaders made for a good story, but one that is not necessarily unique,” he says.

He claims the US small-cap universe will always provide investment opportunities as it is so vast in size, but admits these types of stocks “require patience and the stomach to handle short-term price fluctuations”.

There are other well-known US large caps that posted strong numbers last year, too – notably Apple, which reported the biggest annual profit in corporate history at $53.4bn. Other strong performers include Microsoft, Salesforce, Priceline, Starbucks and eBay.

For Artemis’ US equities manager Cormac Weldon, disruption will remain a theme this year. “We expect the debate surrounding ‘disruption’ to remain front and centre,” he confirms.

“So far, it has been the winners from disruption (like the Fangs) who have received the bulk of the attention. But we must imagine that the incumbent companies will react to this competitive threat.

“Some, like Wal-Mart, will increase their investment in online strategies. We also believe M&A activity is likely to intensify in some of these disrupted industries.”

Also hanging over US equities is the question of whether valuations have become too expensive. Mr Bulko comments: “Valuations are elevated based on historical averages using various metrics. While valuation multiples may continue to go higher, we expect returns to increasingly be derived from earnings growth in a maturing US economy.”

Mr Wintle acknowledges that by traditional metrics, such as price-to-earnings ratios, stocks are looking expensive – but he questions the relevance of such valuation metrics to businesses like Amazon and Facebook.

So can investors expect better returns in 2016 from their US equities portfolio? Mr Wintle suggests investors hold on to the large-cap stocks that performed well in 2015 as they will continue to do so this year.

Mr Weldon adds: “Like last year, we believe 2016 will be a market for stockpickers. In the absence of help from monetary policy, company fundamentals and valuations will be key.”

Ellie Duncan is deputy features editor at Investment Adviser

US or Europe?

Wouter Volckaert, manager of the Henderson Global Trust, weighs up the investment case for US equities when compared with European stocks.

“The good news is that the US is under-owned by global investors, with Europe the most overweight region. And it’s easier for investors to find good companies at a reasonable price in the US.

“The European market is cheaper, but to benefit from that you need to invest in riskier stocks such as Greek banks. Quality defensive European stocks are currently valued near record levels.

“We see the opposite in the US, where the market is slightly more expensive but that is mainly on the back of very expensive growth stocks. Quality stocks are actually reasonably valued.”

Sector guide 2016

Steven Bulko, chief investment officer, LO Funds Fundamental Equity Long/Short fund, reveals his sector-by-sector analysis for the new year.

Technology

Despite the rising interest-rate environment, we anticipate that higher-multiple, faster-growing tech companies with improving margins will outperform, particularly in the semiconductor sector.

Energy

As the introduction of incremental barrels from Iran continues to stress the market, inventories will take longer to balance and cuts to production will be even more severe. This dynamic will continue to weigh heavily on the US shale industry.

Industrials

In the US, defence and companies levered to construction outperformed in a tough market and are likely to continue to do well in 2016. But overall we expect the industrial space to underperform again.

Healthcare

The debate on pricing is likely to dominate the US political landscape in 2016. This overhang will significantly reduce terminal values and increase discount rates for the space, reducing upside opportunities.