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Fund Picks for an Expensive US Stock Market

US equities look expensive on most traditional valuation measures, with the S&P 500 trading at a multiple of 25.7 times earnings

Fatima Khizou 6 June, 2017 | 3:37PM

US equities have continued their upward trajectory in 2017, with the S&P 500 index registering a total return of 8.6% – the first three months of the year clocked its best quarter since the end of 2015. Technology stocks lead the market, as the sector delivered strong earnings and the highest growth rate in the S&P index.

Within this segment, Facebook, Amazon, Netflix and Google – the FANG stocks – were the strongest performers, returning an average of 15.1%. On the other side of the scale, the energy sector was the worst performing area of the market, sliding by more than 6% as investors started to question the effectiveness of the OPEC deal.

In terms of market capitalisation, small cap stocks, which were the standout in 2016, have lost momentum on the back of declining earnings and an elevated valuation. Overall, US equities look expensive on most traditional valuation measures, with the S&P 500 trading at a multiple of 25.7 times earnings. This level is well above its ten-year historical average of 16.4 times.

Which Funds Do Analysts Favour?

The Franklin US Opportunities fund has a Morningstar Analyst Rating of Bronze and has been managed by Grant Bowers since March 2007. The emphasis is on companies with high barriers to entry, competitive advantages, quality management and attractive valuations.

Portfolio positioning has favoured the technology and healthcare segments in the past few years, accounting for over 50% of the overall assets at the end of February 2017. While 2016 was a dreadful year for this fund and many of its growth counterparts, the long-term track record remains strong and year-to-date returns have propelled the fund to the top decile.

The Fidelity America fund holds a Morningstar Analyst Rating of Bronze and is run by Angel Agudo. Most of the research is done by the manager, who targets significantly undervalued companies with a skewed risk/reward profile.

Typically, these companies would have gone through a period of underperformance, where little value is ascribed to their recovery potential, and therefore there is strong relative upside and limited downside potential. Risk management is at the core of this process. The portfolio holds about 50 stocks, and exhibits a value tilt, with financials and technology being the largest weightings.

A version of this article appeared in PVM magazine

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.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Fidelity America A-Dis-USD11.08 USD0.56
Franklin US Opportunities W Acc3.15 GBP0.06

About Author

Fatima Khizou  is an Investment Research Analyst for Morningstar

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