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US equities: do American or British managers have the edge?

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by Robert St George on Apr 25, 2014 at 14:31

This week's data from Citywire Discovery look at the North American equity sector

There is almost certainly no definitive answer to the question of whether a regional equity manager should be based locally or not. There are superficially compelling arguments on both sides, typically based on easy access to company management and greater exposure to market sentiment or the value of perspective and isolation from market noise.

The numbers aren’t conclusive in either direction, but this week’s data from Citywire Discovery highlight an interesting split in the North American equity sector.

The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact support@citywireinsight.com

The chart above plots managers’ long-term risk-adjusted performance against their medium-term risk-adjusted returns, with the size of the bubbles representing their market share. Opting for risk-adjusted numbers strips out the benchmark effect, revealing those who are genuinely adding value in what is considered a predominantly beta-driven market.

In essence, those managers higher up the chart have the better records over the past 10 years while those furthest to the right have done better over the past three years. The optimal location is therefore the top right, which indicates a manager’s ability to add alpha over both time periods.

This quadrant is dominated by two Americans: Duilio Ramallo’s £4.7 billion Robeco US Premium Equities fund, with a 7.3% market share, and the £1.1 billion T. Rowe Price US Large Cap Growth Equity fund run by Citywire + rated Robert Sharps, who has a 1.8% market share.

In contrast the top left of the chart – denoting those with strong long-term records but weaker recent performance – is held by a trio of Brits with fairly large funds of their own: Felix Wintle’s £337 million Neptune US Opportunities, Aled Smith’s £981 million M&G American, and Peter Kaye’s £1 billion Fidelity American.

Whatever is behind their grouping in that corner – and they all have slightly different approaches, with varied sector weightings, within the confines of being large-cap US growth investors – their poorer numbers of late have not shaken up fund flows in the sector. None of their market shares, nor those of their opposites in the top right, have moved by more than one basis point over the past year.

Unlike the dynamic reallocations witnessed in other sectors over the past 12 months, then, it seems fund buyers in this space are prepared to stick with those they know and like despite shifts in performance and a wealth of alternative options.

Duilio Ramallo, Robeco US Premium Equities

Somewhat incongruously, a Dutch group has taken the North America sector by storm. Duilio Ramallo’s fund enjoys a commanding position in the important top-right corner of the chart for his impressive long and medium-term performance, and also boasts the greatest market share in this peer group – two characteristics that do not often sit together.

By style, Ramallo invests across the market-cap spectrum with a value bias. This emphasis on valuations stands in contrast to most of the other constituents of the sector, who are out-and-out growth managers.

It also explains why Ramallo shows so strongly on a risk-adjusted basis, although his absolute numbers are impressive too. By backing the companies undergoing a re-rating rather than simply participating in a market rally, Ramallo is adding true value.

His largest holdings are currently fairly evenly spread across financials, healthcare and technology, with JPMorgan Chase his top individual position.

Ramallo considers the market to be engaged in a ‘cat and mouse’ game with central bankers at the moment, but is betting that stocks will ‘grind higher’ thanks to steady economic growth, low inflation and solid earnings.

Three-year total return: 48.5% (peer group average: 35.8%)

Jonathan Simon, JPM US Value & JPM America Equity

Up there with Ramallo in terms of market share is JPMorgan’s Jonathan Simon, who runs £2.9 billion across his two funds in this sector.

US Value naturally has the titular value tilt, while America Equity is a blended portfolio that combines the JPMorgan team’s best US equity growth and value ideas. Just two stocks currently appear in the top holdings of both funds: Wells Fargo and Exxon Mobil.

Of the two, America Equity has tended to be the better performer: over one, three and five-year periods it is around 5-10% ahead of US Value.

Ramallo also has different co-managers on each of the funds. On US Value, he works alongside Clare Hart; on America Equity he is partnered by Gregory Luttrell. Both of his colleagues are American, whereas Simon is British.

Earlier this year JPMorgan launched an onshore version of America Equity, as revealed by Wealth Manager, with the firm saying it had detected a shift in investor demand from US equity income to high alpha strategies.

Three-year total return: 48.5% (peer group average: 35.8%)

Gordon Grender, GAM North American Growth

The most experienced manager in this peer group is GAM’s Gordon Grender, who has 29 years under his belt in this sector. He does not, though, have the assets to show for it: at £306 million, he has just a 0.4% market share. His performance has nevertheless been good: he is top quartile over both 10 and three years.

Grender is an advocate in particular of the small and mid-cap space in the US, believing it to be under-researched by both investors and sell-side analysts. So while his two largest positions are in the well known defence giants Lockheed Martin and Northrop Grumman, the rest of his top 10 is peppered with less familiar names: the likes of insurer WR Berkley and healthcare firm ICU Medical.

This has, however, cost him of late as the broader market has spiked up and down. The fund has slipped into the sector’s bottom decile over the past three months, with Grender highlighting the impact of a large stake in electronics retailer Conn’s, which crashed 43% in a single day in February after issuing a profit warning.

Three-year total return: 48.6% (peer group average: 35.8%)

Edwin Walczak, Vontobel US Equity

Citywire + rated Edwin Walczak is one of the lesser known managers in this group of US equity veterans, a factor of Vontobel’s low profile in the UK and weak record over the past decade.

Yet that would overlook a superb recent resurgence in his strategy. From being bottom decile on a 10-year view, he is now top decile since 2011.

The majority of that outperformance came earlier in the period, however, and the fund has slipped into the bottom quartile over the past year.

His £957 million fund, co-managed with A-rated Matthew Benkendorf, also has a value style (although earlier this year Vontobel dropped ‘value’ from the fund’s name, saying it preferred to think in terms of ‘quality growth’) and its portfolio is slanted to consumer titans like Coca-Cola and Philip Morris.

Benkendorf additionally runs global and European equity funds, both of which are top decile over the past three years – as well as bottom decile over the past year. The team truly is one that excels in spells when value disciplines are rewarded, but is punished when growth regains market favour.

Three-year total return: 57.1% (peer group average: 35.8%)

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