A core US fund that should be part of every portfolio

Fund managers have always found it harder to outperform in the US than in any other market, which is why so many have chosen to invest via passive funds and exchange traded funds.

The US market accounts for well over half of the MSCI World index, but the intensity of competition makes it hard for anyone consistently to gain an edge. In addition, the largest companies have outperformed in recent years, yet fund managers nearly always tilt their portfolios away from the giants to allow them to invest more in companies that have only a tiny weight in the S&P 500.

An exception to the rule

Still, one fund stands out. Since Tim Parton and Jonathan Simon were appointed co-managers of the £1.5bn JPMorgan American Investment Trust (LSE: JAM) in 2019, they have outperformed the S&P 500 by 3% per year.

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The duo manage a portfolio of just 40 stocks, with Parton running the half made up of underappreciated “growth” opportunities, and Simon the half made up of “value” stocks with a “durable franchise”.

Parton avoids stocks without established businesses or visible cash flow. Simon avoids those that are simply cheap. Value includes Bristol Myers and Abbvie in the healthcare sector and Berkshire Hathaway in the financials.

Growth is underweight in technology, but includes agricultural machinery company John Deere and Intuitive Surgical in healthcare. Both keep an eye on the benchmark so Apple is held at a below-benchmark weighting. There’s Mastercard, but not Visa; ConocoPhillips, but not ExxonMobil.

Tesla was recently bought back after being sold last year. JPMorgan Chase cannot be held, but there is a sizeable holding in Bank of America. The value is added in lesser-known companies such as Loews (hotels, insurance, energy and packaging), Weyerhaeuser (the largest listed timber company), Martin Marietta (building products) and Packaging Corporation of America.

Some 5% of the portfolio is invested in smaller companies by a separate team, though this has held performance back recently. The equivalent of 6.5% of net assets is borrowed to enhanced performance.

The overall portfolio valuation is similar to that of the S&P 500, and the average market value of the holding is only 10% less, at $552bn. This makes the solid performance achieved while carefully controlling the risk relative to the S&P500 all the more creditable.

The trust deserves to be a core holding in almost any portfolio, particularly since UK investors tend to be underexposed to the US market as a default consequence of a high exposure to the UK. Those who relaxed about their avoidance of the “expensive” US market when the UK index at last started to outperform earlier this year need to start worrying.

The UK’s relative recovery is starting to look like a flash in the pan due to the poor performance of its financial sector and the carpet-bagging stocks from emerging markets.

American alternatives

There are two other investment trusts focused on North America: Baillie Gifford US Growth (LSE: USA) and Pershing Square (LSE: PSH). Both have performed well in the last three years, but JAM gives the broadest exposure to the US market. US Growth has performed well when growth shares are in favour, but not when value is outperforming. Pershing Square is highly focused – it has just 11 holdings, of which two are below 1% of the portfolio – and often activist in its approach, seeking to bring about change in the companies in which it invests.

However, that is not the case with two recent investments in Universal Music (25% of the portfolio) and Netflix (11%), the theses for which look highly promising. With a three-year return of 124%, PSH’s 30% discount to net-asset-value compared with 3% for JAM can only be described as bizarre.