Say the term US stock or US equity fund, and tech stocks are probably the first thing which come to people’s minds.
But why do US equity funds matter, and how do they differ from UK equity funds?
Tech heavy?
Several in the industry share the view that technology has a pivotal role to play in US equity funds, but this is less so for UK equity funds.
Jason Hollands, managing director at Tilney Investment Management, says: “The US is home to many world-leading international businesses and a highly developed investment ecosystem that is unrivalled by any other major economy in nurturing and scaling up innovative companies right through from start-up to multi-billion dollar enterprise.”
He adds: “While only two of Europe (ex-UKs) 100 largest firms were created after 1975, in the US the figure is an impressive 19 such businesses.”
Mihir Kapadia, chief executive of Sun Global Investments, says: “As technology is constantly changing and encompassing so many different aspects, it has a large presence in many funds and investors, who think they are diversifying, do not realise the overlap and sector concentration is high in portfolios of different funds."
He adds: “However, there are still some good opportunities for successful long-term investments.”
Anthony Willis, investment manager in BMO GAM’s Multi-Manager team, echoes this view.
The very different sector make-up of the US market gives it much greater skew to growth Jason HollandsHe says: “Many funds that invest in the ‘growth’ sector of the US market will have a bias towards tech names but the size of the US listed market means there are plenty of funds that are not dominated by the tech name.”
Mr Willis explains how Microsoft, Apple, Amazon and Facebook - the four largest companies in the S&P 500- will have a sizeable weighting in tech “but funds with managers seeking to generate alpha from stockpicking or from taking a contrarian view may well have a far lower tech weighting”.
US versus UK equity funds
US equities form 54 per cent of the MSCI World Index, a global market cap weighted stock market index of 1655 constituents.
While almost one in two global equity funds are US funds, how do they compare to UK equity funds?
Mr Hollands says: “The UK market has a much more cyclical bias, with significant exposure to financials, oil and gas and consumer goods but barely any exposure to technology.”
He points out that conversely tech stocks now account for a whopping 21 per cent of the S&P 500 Index and a further 10 per cent of the market is in communication services companies such as Facebook and Google owner Alphabet.
Mr Hollands adds: “The US is also the dominant market globally for healthcare and biotechnology. The very different sector make-up of the US market gives it much greater skew to growth.”
Dividends
Mr Hollands highlights the UK has a strong and deeply embedded dividend culture, in contrast to the US which he says remains a low yielding market where corporates are more likely to engage in stock buybacks than dividends as a means of returning capital to shareholders.
“This can present a real dilemma for advisers and wealth managers structuring portfolios for clients seeking income, as it naturally leads them to be underweight the largest equity market on the globe,” warns Mr Hollands.
Mr Willis agrees.
He confirms: “The US equity market pays out a significant amount of dividends but the culture of dividend paying is far more entrenched in the UK, with the FTSE100 yielding around double that of the S&P500.”
Brexit
Experts believe that prolonged uncertainty caused by UK’s looming departure from the EU has given US equity funds a competitive advantage over UK funds.
Mr Kapadia explains how US investments have performed better than UK ones in recent years in part due to the weakness of sterling against the US dollar since the UK referendum in 2016.
“[US investments] dominate the tech sector, with Microsoft and Apple to name just a couple of companies being the big driving factors for this.”
Mr Willis says: “Whilst every country faces uncertainty, the UK is particularly vulnerable for the moment thanks to the ongoing uncertainty over Brexit.”
He thinks while the US faces problems of its own, there are strong arguments for having a diversified portfolio and investing internationally.
He adds: “Any investor looking to invest in the US instead of the UK will have a far larger universe of companies to invest in as well as getting exposure to some of the fastest growing companies in the world."
But he warns that “If you’re looking for income though, look elsewhere”.
Mr Kapadia strikes a more optimistic note on the future trajectory of UK equities.
He says: “The main concern over UK equities is how Brexit will look in the future. It will have a quick and sudden impact but we expect this to balance out despite the doom and gloom being predicted by some.”
He says this will mean there are many bargains for investors to take advantage of, and in doing so investors will reap the rewards as you will be able to buy low and sell high.
He adds: “Therefore, although US equity funds still command the upper hand, you should not write off what the UK has to offer.”
saloni.sardana@ft.com
