Trying to outperform the S&P 500 as an active manager is a lot like trying to outshine a star sibling – at some point, you may just have to accept defeat.
But not so fast.
Asset Allocator’s 100 Club release gave us the chance to take a look at the best-performing US equity funds over both one and five years, and what we found was a handful of funds which managed to beat arguably the most efficient market in the world, and on a quite consistent basis too.
JPM American was the standout performer in this asset class, returning 127 per cent over five years when compared to the index’s 80 per cent. Sheesh.
Its record also stretches back further – managing to outperform even on a 10-year basis.
The fund is held by just two allocators in our database, though Quilter holds the investment trust version.
We spoke with the team to gauge their satisfaction with the holding.
“Active managers have faced challenges in outperforming the S&P 500 in recent years due to several factors, including market efficiency, fees, and at times, the market’s increasing concentration in a select few high-performing companies,” said Carly Moorhouse, fund research analyst at Quilter Cheviot.
“Investors lacking a significant stake in these stocks likely found it difficult to match, much less beat, these returns. Although only a small proportion of active managers have outperformed the S&P 500 in recent years, it remains a feasible achievement, as evidenced by some, notably the JPM American trust.”
The fund is constructed in two halves: each manager selects 20 large-cap stocks, one growth and one value. This is complemented by a set of modest small-cap holdings.
Moorhouse said their success can be put down to strong stock selection, canny use of leverage, and the combination of growth and value which offers a blended fund for all weathers – a product that’s not so common across the pond.
She said that the trust is one of the few ‘rare core funds’ available.
Active lifestyles
Another strong contender in our 100 Club was Natixis Loomis Sayles US Equity Leaders, which returned 105 per cent over five years.
This mandate is considerably more popular among our DFMs, held by five in total.
We caught up with one of them to give us the lowdown.
Mark Preskett, portfolio manager at Morningstar, said the fund’s particularly pronounced growth bias, coupled with going overweight Nvidia, Meta, and Alphabet, has been the main recipe for its success.
“In our managed portfolios, we pair it with a value fund to try to dial back the portfolio's heavy style tilt,” he said.
Preskett also noted that it tends to be easier for managers to generate alpha when competing against an investor base that is trading more frequently, such as in the US, where stock turnover is higher.
A tall task
Despite the stellar performance of both funds, the S&P 500 remains notoriously difficult to get the better of and, at 7bps for an ETF tracker, it can’t exactly be beaten on cost.
In our chats with DFMs we’ve noted that they’re increasingly saving their active budget for the least efficient markets with the most opportunities, while using passive instruments for markets such as the US.
Mark Northway, who runs a passive DFM at Sparrows Capital, shared his thoughts with Asset Allocator on the impressive approach of the JPM mandate.
He said a glance at the holdings provides clear evidence of conviction and of active share: its managers are underweight Apple and Amazon while Alphabet and Broadcom are both absent.
Northway says the team has also made a statement in their sectoral allocations: tech sits almost 5 per cent below benchmark, while financials are overweight versus the S&P.
“It is incredibly difficult to beat a market benchmark consistently over time, and this performance and the associated consistency of style are to be praised,” he said. “JPMorgan houses more than its share of consistent alpha producers in both open-ended and closed-ended form which underlines the superiority of a highly professional corporate culture over the vagaries of star managers.”
However, when looking at the wider investment journey, Northway sees the fund as having taken a more difficult route to a very similar destination.
“The modest amount of overall alpha produced, combined with the risk required to achieve it, underline the active/passive conundrum,” he added.
“Over 10 years to May 30, an S&P 500 tracker would have produced a near-identical total return of 314 per cent versus the JPMorgan American investment trust’s share price return of 338 per cent. Is an incremental return of 0.65 per cent per annum really worth the noise and the worry?”
