8 funds to ride the US bull market

It is hard to imagine a less likely President than Donald J. Trump, yet there is no doubt that his election success has been well received by the markets. When Hillary Clinton accepted defeat last November the most widely reported US stock market index, the Dow Jones Industrial Average, was trading below 19,000 points, but in the intervening 12 months or so it has climbed steadily and is now hovering around 23,000 for the first time in history.

The President’s business-friendly policies of deregulation, higher infrastructure spending and tax reductions would provide a massive boost to the economy if he could actually get the legislation onto the statute books. Despite the fact that he is yet to deliver on any of these areas, the potential benefits have been enough to propel the Dow Jones and the broader S&P 500 index to record highs.


Much of the stock market performance in the last few years has been driven by the meteoric rise of the leading technology companies. The so-called FANG stocks – Facebook, Amazon, Netflix and Google – now look dangerously overbought and at risk of a substantial correction, although other parts of the market do not look as vulnerable. The economy also seems to be in reasonable shape with consumer and smaller business confidence improving since the election.

If you are a long-term investor and want to maintain a diversified and representative portfolio you will need some sort of exposure to the world’s largest stock market. Unless you want to hold a selection of individual US shares you will need to invest in one of the many funds that specialises in this area.

The road ahead

Patrick Connolly, a Certified Financial Planner at Chase de Vere, Independent Financial Advisers, says that US equities have performed incredibly strongly in recent years to the extent that, on most measures, the US stock market now looks expensive.

“Investor sentiment has remained positive and the market has shrugged off a whole host of global and domestic risks such as escalating debt levels, Chinese banking concerns, the actions of Donald Trump, concerns about North Korea and the unresolved problems in the Eurozone.”

Despite all this Connolly is confident about the long-term prospects for the US, although he says that there must be some concern with investing new money at these levels after the market has already risen so much.

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“Investor sentiment could turn more negative if any of these global issues escalates or if company earnings don’t improve to justify stock market valuations, if Donald Trump enacts protectionist policies, if the US dollar strengthens [to the detriment of large exporters], interest rates rise quickly or if we see increased wage growth.”

What happens from here could largely depend on how investors react to policy changes at the US central bank. The Federal Reserve has recently begun to unwind the massive stimulus that it put in place after the financial crisis ten years ago. It has also indicated that it expects to increase interest rates once more this year and three times next year.

If the Fed gets it right and manages not to undermine the economy or investor confidence there is a chance that the bull market could continue. If they get it wrong, investors could be in for a rough time and the Trump bump might give way to an altogether more uncomfortable ride.

A market that’s hard to beat

The US stock market is the largest in the world and one of the most efficient where companies are heavily researched and information about them is widely known. In this sort of environment it is a real challenge for fund managers to recognise opportunities that others have missed.

This makes it notoriously difficult for active funds to consistently outperform the main US stock market indices, which means that there’s a strong case that a long-term investor should use a low-cost index tracker instead.


A good example is HSBC American Index, which tracks the S&P 500, an index that measures the performance of 500 large US stocks listed on the New York Stock Exchange or NASDAQ. It has almost £3 billion in assets under management and low ongoing charges of just 0.07%. The tracking error – the amount by which the performance differs to the index – is also very low.

Another decent option is the Vanguard US Equity Index Fund. This tracks the much broader S&P Total Market Index that is made up of 3,765 US companies. The fund offers a more diversified exposure and invests in the underlying stocks to replicate the performance. It has low ongoing charges of 0.1%.

According to data from FE Trustnet, over the last five years HSBC American Index was the 23^rd best performer out of the 127 OEICs and units trusts in the North American Sector with a return of 131.7%. Vanguard US Equity Index also did well with a gain of 130.7% that put it in 25^th place. This means that both of these index trackers beat the majority of the actively managed funds operating in this area.

Active funds that add value

If you want to try for some outperformance your best chance would be to invest in an actively managed fund with a distinctive, proven approach and the flexibility to invest some of its capital in the mid and small cap segments of the market.

Darius McDermott, MD of Chelsea Financial Services, recommends Brown Advisory US Flexible Equity. The fund is run by the experienced duo of Hutch Vernon and Mike Foss, who manage over $4 billion in this strategy with the support of a team of more than 21 analysts. It’s an unconstrained fund and one of the few to consistently outperform the S&P 500 over long periods of time.

“Vernon and Foss look for stocks with favourable business economics, enduring competitive advantages, and positive industry dynamics, as well as capable and trustworthy management. They avoid companies that have excessive financial leverage, business or product obsolescence, complex business models, or no history of making profits,” he says.

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Another of his picks is Schroder US Mid Cap, which is run out of New York by Jenny Jones. The manager has a highly distinctive approach and targets three different types of growth stocks in the portfolio.

There are the ‘mispriced growth’ stocks, which are companies with unrecognised growth dynamics; these are followed by the ‘steady eddies’ that have recurring earnings/cash flow/revenue characteristics; and then there are the ‘turnaround’ stocks that have experienced business or operational difficulties.

McDermott’s other selection is Hermes US SMID Equity, which invests in US small and medium-sized (SMID) companies valued between $1 billion and $20 billion.

“The managers look for quality companies with low debt in industries with high barriers to entry, or that provide products or services that cannot be easily replicated. In a market that is notoriously difficult to beat, they have built up an enviable track record, outperforming the peer group and index consistently over the years.”

US investment trusts

There are only a handful of investment trusts that provide exposure to the US market with by far the largest being JPMorgan American (LON:JAM) with a market value of £906 million. (See fund of the month below.)

Most US funds have very low yields, so if you are looking for a mixture of growth and income you might prefer The North American Income Trust (LON:NAIT). This £363 million investment trust mainly invests in constituents of the S&P 500 and is currently yielding 2.95% with quarterly dividends.

North American Income has a concentrated portfolio of 48 stocks and eight corporate bonds. The 10 largest holdings make up about a third of the assets and include well-known companies such as Pfizer, Chevron, Dow Chemical and Proctor & Gamble. Its portfolio is heavily weighted in favour of higher yielding sectors like Financials, Materials and Energy and this enables it to pay a yield that is about 50% higher than the S&P 500 index.

Since Fran Radano and Ralph Bassett took over the management in June 2015 the NAV total return has beaten its two benchmarks – the S&P 500 and the Russell 1000 Value index – by 11% and 17% respectively. The shares are currently available on an 8% discount to NAV.


If you already have a US fund to provide your core exposure you might want to add some extra growth potential via the JPMorgan US Smaller Companies Investment Trust (LON:JUSC), which is recommended by the analysts at Winterflood and Numis.

Don San Jose has been the lead manager since February 2013 and he has put together a diversified portfolio of 97 holdings. He uses a bottom-up stock selection approach and looks for companies with a sustainable competitive advantage, run by competent management teams that have built up a successful track record. Ideally the companies should also be trading at a discount to their intrinsic value.

The fund has a strong long-term performance record with the share price up 235% over 10 years. It is currently trading on a 3% discount to NAV.

One final point to keep in mind is that all of these funds provide an indirect exposure to the dollar-sterling exchange rate. If the US dollar strengthens against the pound it would increase the returns for a UK-based investor, whereas if it weakens it would undermine them.

FUND OF THE MONTH

JPMorgan American is the largest investment trust to invest exclusively in US equities and is the one recommended by the analysts at Numis to offer a core exposure to this key market. The large cap part of the portfolio has been managed by Garrett Fish since November 2002, while the small cap element that can account for up to 11% of the assets is run by Eytan Shapiro.

There are currently around 190 holdings with just over half of them in the small cap part of the fund and these provide a well-diversified exposure to this high growth part of the market. The 10 largest positions account for a third of the assets and include familiar names such as Apple, Microsoft, Citigroup, Bank of America and Wal-Mart, as well as the highly regarded biotech company Gilead Sciences.

The investment trust analysts at Winterflood Securities rate Garrett Fish highly and believe that the fund should outperform the US equity market over the long-term. Over the last 10 years the shares have returned 237%, which is about 20% ahead of the total return from the S&P 500 index.

Fund Facts

Name: JPMorgan American (LON:JAM)
Type: Investment Trust
Sector: US
Total Assets: £1,060 million
Launch Date: 1881
Current Yield: 1.3%
Gearing: 10%
Ongoing Charges: 0.62%
Manager: Garrett Fish
Website: www.jpmorganamerican.co.uk