The best way to profit from the liquidity fuelled bull market in US equities

US equity markets continue to push higher. The S&P 500 index is now just three points below its all-time high, while the Dow is well above the historic high it made back in October 2007. As noted here previously, this market is not being driven by terrific fundamentals such as record earnings. Rather it is being driven higher thanks to the unprecedented liquidity being provided by the US Federal Reserve and other central banks.

The rally in US equities, which is likely the start of a new bull market, is being fuelled by the Fed’s policy of QE to infinity. Announced in September 2012 and designed to aid the economic recovery, The Fed is now buying up $85 billion of securities a month with no end in sight.

Since the start of 2013 the Dow Jones Industrial Average has risen by 11.9%, and although the market is undoubtedly due for a pullback, Tracy Knudsen, Senior Analyst at Lowry’s Research, believes that this will be at most around 5%, and that the long-term outlook for stocks is strongly bullish. In addition, other respected market technicians such as Stan Weinstein and Louise Yamada who were cautious or bearish on the market a few months ago, are now becoming increasingly bullish.

What’s the best way to profit from the rise in US stocks?

If US equity markets do continue to rise, the question is what’s the best way to profit from it? The obvious answer is to invest in an index fund that tracks a broad basket of US equities such as the S&P 500.

HSBC American Index Fund

One of the cheapest tracker funds that tracks the S&P 500 is the HSBC American Index Fund which has a Total Expense Ratio (TER) of 0.28%. The fund’s objective is to provide long term capital growth by matching the performance of the S&P 500 stock index. Over the past 12 months the fund has risen by 19.9% versus 18.2% for the S&P 500.

HSBC S&P 500 ETF

Another option is the HSBC S&P 500 ETF which tracks the S&P 500 and has a TER of 0.09%. The objective of the fund is to replicate the performance of the S&P 500 index, while minimising any tracking error. Over the past 12 months the fund has risen by 18.3% versus 18.2% for the S&P 500.

The challenge for investors is beating the performance of the S&P 500. As the S&P Indices Versus Active Funds Scorecard (SPIVA) reveals, most active managers in most categories continue to underperformed their respective benchmarks.

In 2012 performance lagged behind the benchmark indices for 63.3% of large-cap funds, 80.5% of mid-cap funds and 66.5% of small cap funds. Only US large-cap growth and real estate funds outperformed their respective benchmarks during the year, although they too underperformed over three- and five-year periods.

There are however, a handful of funds who do consistently manage to beat the performance of the S&P 500.

GAM North American Growth fund

One such fund is the GAM North American Growth fund, which seeks capital appreciation through a concentrated portfolio of US and Canadian stocks. The fund is managed by veteran manager Gordon Grender who has over 40 years’ investment experience, and an excellent track record of identifying undervalued stocks that are overlooked by the wider investment community.

Using extensive independent research and bottom-up analysis Gordon looks for well run companies which he believes are undervalued in relation to their long-term prospects.

The fund was ranked first for performance over 10 years in the Lipper UK Fund Awards 2009 Equity North America category and Gordon is rated by Trustnet as an “Alpha Manager” meaning that he is rated among the top 10% of UK retail fund managers.

The funds top 10 holdings (which account for 43.6% of the fund) do not include the usual suspects. Instead you will find companies such as Huntsman, a global manufacturer and marketer of differentiated chemicals, and Church & Dwight, a company that produces products used in household cleaning, laundry and personal care.

The fund is currently weighted in favour of the consumer discretionary sector and financials, with healthcare and materials not far behind.

Performance

Over the past 12 months the GAM North American Growth fund has returned 23.0%, versus 19.4% for the S&P 500 (data as at 28 Feb 2013). Since its inception on 2 January 1985, however, the fund has returned 2,571% versus a return of 1,260% for the S&P 500 (see chart below).

GAM North American Growth fund

Performance from 2 Jan 1985 to 28 Feb 2013

Of course, there is no guarantee that Gordon Grender can go on beating the performance of the top 500 US companies, but, his focus on solid, simple businesses with decent sales growth and prudent management is a tried and tested formula. Just ask Warren Buffett.

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