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?
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.
He 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.”
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.