Finding funds that consistently outperform the American market is, it is often said, notoriously difficult. This has certainly been the experience over the past decade, accentuated in the past few years by the dominance of larger companies in dictating market returns, notably the so-called ‘FAANG’ stocks: the quintet of Facebook, Apple, Amazon, Netflix, and Google, whose parent company is Alphabet.
These tech giants have experienced exceptional growth rates for companies their size and have really helped propel the US market upwards. Sensing their shares are too expensive, or else concerned about putting a large amount of a portfolio in one sector, many fund managers have avoided putting too much money in these stocks. This has been detrimental to performance as shares continued to move higher and active fund managers have struggled to justify their higher fees over ‘passive’ alternatives whose job it is to mirror the performance of the index rather than beat it.
One fund that has been able to outpace the market during this ten year period is Old Mutual North American Equity (data from FE Analytics). What has been essential to the fund’s success is that it is run on a quantitative basis designed to shut out any human emotion. The management team led by Dr Ian Heslop believe that markets are not fully efficient and that stock prices often diverge from their fundamental value due to investors’ behavioural biases.
The fund seeks to exploit these biases by examining stocks through five different lenses: Dynamic Valuation, Sustainable Growth, Analyst Sentiment, company management and market dynamics.
The Valuation process measures stock quality and adjusts to mirror prevailing market and macroeconomic conditions, Sustainable Growth aims to distinguish companies able to produce consistent, long-term earnings growth from those whose growth is more erratic in nature, and Analyst Sentiment aims to capture the over or under-reaction to a change in analyst forecasts. Company Management explores how surplus working capital is used and, finally, Market Dynamics considers the momentum of share prices and the scope for reversal from the prevailing trend.
In essence, the investment process recognises that markets rise and fall for a myriad of different reasons, and that investor biases and sentiment play a major role. By unemotionally and systematically exploiting the resulting anomalies the fund aims to outperform by compounding these incremental returns. This can be of little consequence over short periods but can provide the potential to beat the market over the longer term.
Although the list of stocks in the portfolio, typically numbering 200 to 250, are held for a number of months or years many small adjustments are made to the portfolio each day as part of the optimisation process. In contrast to most other funds it is design to offer the prospect of outperformance in a variety of market environments rather than being wedded to one ‘style’ such as value or growth. Should market momentum shift from one style to another the portfolio is designed to pick up on this and follow, albeit with a time lag necessary to eliminate ‘false signals’. If a trend persists the process is designed to keep the fund invested and capitalise, though like any fund there can be periods where it doesn’t work or mistakes are made and the fund underperforms.
The disciplined and systematic approach applied by this fund has led to strong performance versus its benchmark and peer group average over the medium term (five years plus), although past performance is not a guide to the future. Source for data: FE Analytics. The managers' blended approach and efficient portfolio construction aims to result in a ‘fund for all seasons’ with relative outperformance possible in a variety of macroeconomic conditions.
There may be times when the strategy struggles, for instance in a confused or volatile market, but we are nonetheless attracted to the diverse stock selection criteria and highly repeatable process, which could continue to add value over the longer term. As a result of our increasing conviction the fund has been added to the Foundation Fundlist of preferred investments across the major sectors.
This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.