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The secret to US equity funds’ outperformance

It basically only took an overweight to two of the biggest US stocks: Amazon (+32% YTD) and Facebook (+45%), which compares to a gain of ‘just’ 11.59% by the S&P 500. An analysis by Expert Investor shows that seven out of 10 of the best performing active US equity funds in the first seven months of this year have both Facebook and Amazon in their top-three holdings.

The best-performing fund year-to-date is the Morgan Stanley US Growth fund (+31.7%), and it has allocated more money to Amazon and Facebook than any other fund. The fund had a combined weighting of 17% to the two tech giants at the end of June (compared to a total weighting of 3.8% in the S&P 500).

Source: Morningstar

Seven of the nine funds in the YTD top-10 with a track record of more than three years also are top-quartile over three years, with five of these funds even securing a top-10 spot over both time periods. Considering that Facebook and Amazon also significantly outperformed the S&P 500 over a three-year period, this remarkable consistency in performance could well be due in large part to sustained overweights to the two tech stocks over a longer period.

If fund managers had missed the boat on Amazon and Facebook, they certainly would have found it hard to secure even a top-quartile place, but being a growth fund more or less sufficed to outperform the S&P 500 year-to-date.

Growth hasn’t outperformed value in the US to such an extent as it has this year since the dotcom boom around the turn of the century (see chart below). Only six of the 76 Europe-domiciled US Growth funds in the Morningstar database have underperformed the S&P 500 or the average large-cap US equity fund this year. Moreover, the 31 best-performing funds YTD are all growth funds (which as a category only make up three in 10 of all US equity funds).

Unfortunately, European investors haven’t taken advantage of the US growth rally: they have pulled money from US equity growth funds every single month since January 2016. This year, net redemptions have totalled €2.25bn according to Morningstar data.

Part of the Bonhill Group.