The overall trend has been downward since the beginning of the year but the real damage started to occu
r most recently when all the Morningstar US Equity fund categories lost an average of 10.8% in September and 11.4% in October. However, favourable currency movements have eased the pain of UK-based Sterling investors. In the second half of 2008, the Pound has weakened against the US Dollar by around 20% which has helped the returns of Sterling-based US equity fund investors exposed to the US dollar. We’ll take a closer look at how UK-domiciled US equity funds have performed in 2008 so far and see which have managed to offer some resilience in a falling market. This downside resistance is important - the difference in performance of a top quartile and bottom quartile fund ranged between 15-20% for the year-to-date to 31 October 2008.
Large Caps
Funds in the Morningstar US Large Cap Blend category fared the best during the downturn with a loss of 21.77% for the year-to-date to the end of October. However, the winning margin was slim and the US Large Cap Growth category followed closely behind by losing just 63 basis points more. US Large Cap Value funds tended to be the worst performers and the average fund in the category lost a significant 27.23% over the same period. Unsurprisingly the woes of the financial services industry acted as the lead weight here as funds in the category had an average exposure of almost 20%, the highest of all the US Large Cap equity categories.
Across all the US Large Cap equity sectors, those funds that finished in the top-quartile for the year-to-date to 31 October tended to be overweight their category average in the energy and industrial materials sectors. Of all the large-cap funds, Jupiter North American Income fund has shown the most resilience with a loss of 10.68% for the year-to-date to 31 October 2008. Manager Sebastian Radcliffe avoided the most of the turmoil in the financial services industry throughout the year because he has always kept a relatively light weighting the sector. Over the past three years, the fund’s exposure to the financials sector has remained below 15% of the portfolio. The fund’s heaviest weighing has been in the industrial materials sector; although the sector has been hit badly by falling commodity prices recently, Radcliffe has steered clear of mining and resources stocks and this move has buoyed the fund in 2008.
Bill Miller's Legg Mason US Equity is at the bottom of the pile--with a loss of 41.45% through 6 November 2008. The fund is a clone of Bill Miller’s Value Trust fund sold in the US. The fund has been battered in part by Miller's ill-timed forays into financial services stocks. Miller bought into American International Group and Freddie Mac before they were bailed out by the US Treasury as part of a recue plan and he also bought Countrywide Financial and Merrill Lynch before they tanked. These stock picking mistakes makes the fund the worst performing UK-domiciled US equity fund in 2008 so far.
A Look Further Down the Market Cap Ladder – Cash is the key.
Funds in the Morningstar US Mid-Cap Equity category followed the general trend of US equities and lost an average of 23% for the year-to-date to 31 October 2008. The funds that have held up better then their peers during the downturn have tended to have a different cast to those that have performed well in the large-cap space. The better performers tended to be overweight in financials but underweight in energy, healthcare and industrial materials. The top performing US Mid-Cap Equity fund was the Schroder US Small and Mid Cap offering which is run by Jenny Jones in the US. Jones has managed to avoid major losses in her stock picks by focussing on high-quality companies with strong balance sheets but she has also held north of 9% of the portfolio in cash throughout the year which has helped cushion the fund from the market's slide.
Quite unexpectedly, US small caps weathered the downturn in 2008 better than all the other US equity categories - the average fund in the Morningstar US Small Cap Equity category lost 17.5%. However, one particular offering, the GAM North American Growth fund, actually managed a positive return of 3.7% for the year-to-date to 31 October 2008 which makes it the best performing US equity fund in 2008 so far. Manager Gordon Grender runs a compact portfolio of just 29 holdings and he has avoided financial-services stocks altogether. However, the major driver of outperformance was the level of cash he held, which has typically remained above 14% of the fund’s assets in 2008.
The US equity market has been a difficult place to invest in 2008 and many talented managers have been caught out by unforeseen developments over the year. Those funds that have held up better than the rest have one thing in common – they are run by managers who buy quality issues and avoid looking for market tailwinds which is a ploy that has worked out well during these unprecedented times.
