The decision to go active in the US is based on the assumption that there must be more to life than just the cushty 15 per cent annualised return the market has given you over the past decade.

It is true that many of the allocators among us prefer to stick with the trusty S&P tracker, despite the increased top-heaviness of the market which passive investors can merely sit tight and watch – though, nothing too untoward has happened so far. 

Indeed the most popular US equity fund in our database is Fidelity Index US.

Once upon a time it was JPM US Equity Income but this crown was passed on as the lure of simply tracking the market became stronger.

But we sought to get into the minds of DFMs when building up exposure in the world’s most efficient market, and here’s what we found. 

Something different

Being an active manager in the US is no cakewalk, given fund selectors want you to stop hugging the benchmark and pick some gems. The problem is that the benchmark is oh so very huggable. 

All of the DFMs we spoke to desire something very different from the index in their US manager selection.  

Eren Osman, wealth management director at Arbuthnot Latham, said once a passive base is established they can focus on the next layer of funds to diversify away from any overconcentration and pick up other interesting exposures along the way. 

He’s a fan of factor-oriented funds, including size, value and growth, which can be an interesting lens to generate alpha relative to the benchmark. 

Not long ago Arbuthnot bought into a standalone semiconductor fund and we wondered how this complemented their existing US exposure, given chipmaker Nvidia comprises a decent wedge of both strategies. 

Osman is unconcerned. 

“If you are active in your fund selection, it is very difficult to get to an equal weight position in Nvidia or any of the magnificent seven, let alone overweight,” he said. 

“Three years ago this would have been a very different story, and it would have been quite easy to get overweight Nvidia via a semiconductor ETF and I think the driver then is the same as the driver is now, gaining exposure to a number of companies with attractive fundamentals, not just the one at the forefront of the AI revolution.”

In fact the most popular active US equity fund in our database is now Dodge & Cox US Stock, followed by JPM US Equity Income and Premier Miton US Opportunities.

These are all funds which take very different approaches to investing in the US. The first of these is avowedly a value fund which has just 20 per cent of its assets in tech and prefers financials instead. The second of these is, self-evidently, an income fund and therefore likewise shuns growth stocks. And the third of these takes a mid-cap approach, shunning the large companies which have driven markets recently.

Global overlap 

Another topic we covered recently is the extent to which North American equities appear in global funds, given its near-70 per cent weighting in the MSCI World index.

How do DFMs feel about the potential overlap? 

Liontrust’s head of multi-asset John Husselbee agreed there would be an element of commonality in stocks between an S&P tracker and a global active manager, but not all global managers fall into this trap. 

“Global value funds and other global equity portfolios with a contrarian bent have tended to look at markets aside from the US, and while their better performance in 2022 for instance had more to do with sector exposures than regional ones, the two aren't mutually exclusive,” he said. 

But he underlined that Liontrust does not use global funds at all, preferring a regional approach which gives them full control of their asset allocation, as opposed to outsourcing it. 

This is a view shared by Peter Dalgliesh of Parmenion, who also does not hold any global managers. 

He said: “This is made all the harder at potential points of inflection, because the global mandate afforded to global funds means that the positioning you originally bought into comes with meaningful risk of change at any time. 

“You will not hear about it beforehand, only after the event, leading to uncertainty in the consistency of risk adjusted returns to clients.”

He prefers instead to hold a global small-cap manager, of which 70 per cent of its assets are based in the US. 

This is to complement Parmenion’s wider North American exposure of growth, quality, plus a style-agnostic multi-cap valuation disciplined manager. 

Of course as far as our database is concerned, this has yet to play out more widely: the most popular global equity fund is Fundsmith Equity which has a 70 per cent exposure to the US.