The US Funds That Beat the Market

The S&P 500 index is notoriously difficult for fund managers to beat, but some have managed to outperform it over the long-term

Holly Black 26 January, 2021 | 9:25AM
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US funds

The US stock market is a notoriously difficult one for investors to outperform. With more than 500 stocks listed on the S&P 500 and many of them fast-growth tech names, it’s harder to find hidden gems. 

Indeed, Morningstar research has shown that over the past 10 years just 1.5% of funds in the US Large-Cap Equity fund category have managed to beat their benchmark. It’s no wonder then, that just 40% of US funds make it to their tenth birthday.

But there are some funds which do manage to consistently beat the market. We have looked at funds across all US equity categories and found plenty have outperformed over the long-term.

Top Performing US Funds

Among US focused funds with a track record of at least 10 years, Baillie Gifford American is the top performer. Not only did it deliver an incredible 123% return last year, but it has outperformed the S&P 500 by 10% over the past decade. Over the past 10 years, it has produced annualised returns of 25.4%. For comparison, the Morningstar US Large Cap Index returned 18% last year (in GBP terms)

Top US funds

The common theory is that the US market is hard to beat because it is so efficient: stocks are liquid and information about them readily available, which makes it hard to get an edge. But Ben James, US equity strategy specialist at Baillie Gifford, disagrees: “We believe the US is a very inefficient market, and this is wonderful. It is the innovation capital of the world and produces far more outstanding growth companies than any other, which presents incredible opportunities for long-term growth managers.”

Just 90 companies out of almost 26,000 companies on the US stock market have delivered half of the returns over 90 years, says James, and finding those few “exceptional” companies is the key to outperformance.

One of those is, undoubtedly, electric car maker Tesla (TSLA), which is the largest holding in the fund’s portfolio. Last year the company’s share price soared an incredible 700%, contributing heavily to the fund’s outperformance. Other top holdings include Amazon (AMZN), Wayfair (W), Shopify (SHOP) – demonstrating the tech slant of the portfolio.

US funds

Outperforming the S&P 500 

Two Morgan Stanley funds also feature in the list of long-term outperformers: Morgan Stanley US Growth and Morgan Stanley US Advantage have outperformed the S&P 500 by 8.6% and 6% respectively over the past decade.

Morningstar analyst Katie Rushkewicz Reichart rates the Growth fund’s “established and insightful team, and well-executed and distinctive approach”. She likes that the team classify themselves as “company investors” rather than stock-pickers. A tech bias has also contributed to this fund’s strong performance and Reichart says an investment in video service Zoom (ZOOM) helped to protect the portfolio during the worst of 2020’s sell-off.

Two more Silver-rated funds in the top performers' list come from investment group T Rowe Price. Taymour Tamaddon, manager of the T Rowe Price US Large Cap Growth Equity fund, says that owning companies “where we believe the market is underestimating the durablility of growth” is just as important as finding the dynamic, fastest-growing stocks.

So while you’ll see the likes of Amazon and Facebook (FB) in the fund’s portfolio, there are also less obvious choices such as accounting software provider Intuit (INTU) and cloud-based payments firm Global Payments (GPN). The fund, which was up 34.6% last year, has outperformed the S&P 500 by 3.74% over the past decade.

Morningstar’s Reichart says: “During 2020’s coronavirus-driven sell-off, Tamaddon scooped up battered companies such as Carvana and Lululemon – moves that proved fruitful. While tech and communication services are high points, strong small and mid-cap growth offerings also provide a pipeline of ideas for this strategy.”

The Funds That Have Lagged

Of course, not all US funds have managed the feat of beating the market. Over the long-term, a number have lagged the S&P 500. Among them is Manulife GF US Small Cap Equity, which managed to return 20.8% last year, but has underperformed the S&P 500 by 7.61% over the past 10 years. 

bottom US funds

What these weaker performers all have in common is their focus on either small-cap stocks or their value style, both of which have struggled in a world where large growth companies have dominated. While Manulife has a decent chunk of its portfolio in tech companies, they are not the fast-growing that have dominated the index in recent years. Top holdings include J2 Global (JCOM), a provider of business cloud services, and MaxLinear (MXL), which is involved in semiconductors.

The dominance of large-cap focused funds in the top performers list (all 10 belong to the US Large-Cap Growth Equity Morningstar Category) suggests that beating the index may be more about picking its strongest constituents and running them in a more concentrated portfolio.

Franklin Mutual US Value had the worst 2020 performance of the funds in our bottom performers list, down 8.6% in a year where some US stocks doubled, tripled or Tesla-ed. Morningstar analyst Greg Carlson says that despite three veteran portfolio managers and an experienced team, the fund is rated Neutral because of its “truncated tool kit and elevated risk profile”. 

 

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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About Author

Holly Black  is Senior Editor, Morningstar.co.uk