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The active US fund that impressed a passive investor

Seven Investment Management is a big fan of index-tracking funds but it believes it has found one active fund that might beat the US stock market.

 
The active US fund that impressed a passive investor
 

Seven Investment Management (7IM) is best known for providing portfolios of index-tracking exchange traded funds to investors and financial advisers, but this fan of passive investment has revealed it is backing a little-known fund manager in Connecticut in the hope it will beat the US stock market.

The mighty American stock market is notoriously difficult for active fund managers to outperform, which is why 7IM has previously used ETFs to track the S&P 500 and other US indices.

However, as the first anniversary of president Donald Trump’s election victory heralds possible cuts in US tax rates, 7IM believes ‘that the US is in the foothills of a better environment for active managers’.

It said the changes would be potentially good news for US micro-caps, the smallest companies on its stock market, which have stuggled under a costly and complicated tax system.

To take advantage of this 7IM has topped up its position in THB US Opportunities Ucits , a fund it helped to get off the ground earlier this year, run by Connecticut-based manager Thomson Horstmann & Bryant.

The fund focuses on high-quality, self-funded companies with low debt, strong cashflow, and low-cost structures that are dominant players in market niches. The fund is looking for companies that ‘look good from both a growth and value perspective, with a strong likelihood of M&A activity’.

Damian Barry, senior investment manager at 7IM, said the fund ‘allows us to take opportunities in an undervalued, under researched part of the US market, 50% of which is not covered by analysts’.

He said the lack of research creates ‘inefficiencies and opportunities’, especially considering US micro-caps have been out of favour following a brief boost following Trump’s election.

‘This is an interesting, contrarian time to get involved: micro-caps represent a purer way to play to the strength of the US economy compared to more multinational large caps,’ said Barry, who added that the rise of large caps was unsustainable and there was more value in US micro-cap long term.

Barry acknowledged that US micro-caps were a riskier investment area but said they are ‘also potentially more immune to geopolitical events than large caps’ and he was comfortable allocating ‘a small proportion’ of the 7IM Adventurous and 7IM Moderately Adventurous multi-manager funds to THB.

Christopher Cuesta, chief executive of THB, said the micro-cap sector was trading slightly above its the low end of its long-term valuation range and the US economic recovery was broadening. Companies in the sector should benefit from deregulation and tax reform.

‘We are confident these pro-business forces combined with the dramatic recent rise in small business optimism will lead to an increase in positive corporate activity, such as mergers, acquisitions, and capital spending,’ he said.

Five more US small and mid-cap funds

Unfortunately, THB US Opportunities is not easily available in the UK. However, if you like the idea of investing in US small and mid-cap stocks, here are other good performing funds that specialise in this area. 

Company Manager Fund 5 year performance
ICF Management Richard de Lisle VT De Lisle America 165.80%
Artemis Cormac Weldon Artemis US Smaller Companies 152%
Alliance Bernstein James MacGregor  AB Sicav US Small and Mid-Cap 150.80%
Aberdeen AM Ralph Bassett Aberdeen Global North American Smaller Companies 149.50%
William Blair Robert Lanphier William Blair Sicav US Small-Mid Cap Growth  145.30%

3 comments so far. Why not have your say?

Prickle

Oct 29, 2017 at 10:41

Are there any investment trusts specialising in this market?

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Micawber

Oct 30, 2017 at 07:35

@Prickle - ITs: My choice is/has been JUSC, with a five year performance of +180% which comfortably beats any of the above.

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horshamtim

Oct 31, 2017 at 09:32

@Micawber@Prickle As always I agree with you over the use of ITs, and JUSC is the standout performer for US smaller companies over 7, 3, and 1 years as well. It has also outstripped the Russell 2000 index by some margin.

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