S&P 500 Rally: Go Active for Your US Stock Investing

US stock indexes closed at new record high this week, but it raised speculation that how long this rally will last. Is now the time to go active for your US exposure?

Karen Kwok 19 August, 2016 | 12:19PM
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US stocks gained momentum in the first two weeks of August, with all three major US indexes ended at new record closing highs for the first time since 1999. But can the rally continue?

Positive news was in the air: rising oil prices and upbeat US job data growth helped send three major US indexes, Dow Jones Industrial Averages, the S&P 500 and Nasdaq Composite, to their all-time highs twice in August alone.

But new highs raise speculation on how long this rally will last. Despite the fact that the US economy’s fundamentals are increasingly positive with more encouraging economic data, minutes from the Federal Reserve’s latest meeting show policy makers split on timing of next interest rates rise.

"Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information," stated the minutes.

"A couple of members preferred also to wait for more evidence that inflation would rise to 2% on a sustained basis.”

US Stocks Value Under Pressure

Richard Turnill, global chief investment strategist at BlackRock said while strong US jobs data have fuelled speculation of more Federal Reserve interest rate hikes, he believes such expectations are overblown.

“U.S. jobs data are encouraging. Yet inflationary pressures, while picking up, remain modest. Some evidence suggests the U.S. unemployment rate could fall further without triggering significant inflation,” Turnill said. 

“We expect the Federal Reserve to take its time raising rates, and Fed policy meeting minutes may shed light on the bank’s take on global financial conditions and timing of a rate hike.”

Turnill also believed the shifting poll numbers of both US presidential candidates could put downward pressure on risk assets such as equities.

Luca Paolini, chief strategist at Pictet Asset Management however said valuations in US stocks are nowhere near bubble territory yet, adding that “US equities may be trading at more expensive multiples than European counterparts, but we think there is still room for the equity market to appreciate.”

Investors should bear in mind that the coming economic data releases and Fed minutes, as well as the US presidential election in November, will increase the level of market volatility. As a result, investors who have until now gained exposure to the US with whole-market ETFs may want to reconsider their exposure. Actively managed funds and strategic beta ETFs can strip out stocks trading higher than their values, and minimize risk of a market correction. 

3 Top Performing US Active Equity Funds

Using the Morningstar Fund Screener, we looked at top rated US equity funds which are the best performing in their sector year to date. There are two Silver Rated funds and one Bronze Rated fund, up more than 20% to date.

Aviva Investors US Equity Income, the Bronze Rated fund, was one of the top performing funds with 25% return year to date. The fund manager, Henry W. Sanders III, seeks to provide investors with a portfolio that delivers regular income and capital appreciation, said Fatima Khizou, Morningstar fund analyst. They look primarily for strong businesses that are trading at compelling discounts to the team’s estimates of their values.

The managers are willing to invest where they find the most attractive valuation opportunities without being constrained to investing in a handful of typically dividend-paying sectors with limited growth opportunities, such as utilities, Khizou added. The fund tens to hold up well in challenging market conditions, with 17% five years annualised return.

Heptagon Yacktman US Equity, the Silver Rated fund, gained 21.3% year to date and it has a 15% five year annualised return. The fund manager Donald Yacktman prefers companies with predictable, recurring revenue streams, Khizou said. Yacktman has a great record of stock selection from its rather limited investment pool but has shown some past flexibility when assets under management were considerably smaller. The fund has also spurred excellent returns over full market cycles. 

Another Silver Rated fund, JP Morgan US Equity Income  gained 20.6% to date and it has 19.3% five years annualised return. Khizou said the manager Clare Hart prefers stocks paying a minimum 2% absolute yield at time of purchase. This portfolio also generally shows stronger earnings growth and a higher return on equity than peers. 

Or Turn to Strategic Beta ETFs

For fund investors who wish to have US exposure but do not want to pay active management fees, strategic beta ETFs can be an alternatives Strategic beta, also referred to as ‘smart beta’, is a passive strategy with an active overlay. Rather than offer exposure to an entire market-cap weighted indices, a strategic beta ETF will compile its portfolio weighted by a screened theme – be it dividend payouts, valuation or ethical priorities.

Strategic beta ETFs tend to be more expensive than plain vanilla ETFs, but most are still considerably cheaper to own than traditional actively managed funds.

S&P US Dividends Aristocrats ETF (UDVD) provides exposure to a subset of the U.S. equity market focusing on companies that have been consistent in paying out dividends to shareholders. Morningstar analyst Monika Dutt believes this fund could serve as a core U.S. equity holding for investors seeking a regular income stream. The fund is up 30.9% year to date.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Aviva Investors US Eq Inc 1 GBP Inc235.40 GBP-0.19Rating
Heptagon Yacktman US Equity C USD Acc365.62 USD0.67Rating
JPM US Equity Income C Net Inc4.59 GBP0.44Rating
SPDR® S&P US Dividend Aristocrats ETFDis70.53 USD0.27Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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