Surging US stock markets, in particular the outperformance of the Magnificent 7, over the past two years has raised questions about whether investors should even bother looking elsewhere.
The S&P 500 has gained 25.02% and 26.29% in the past two years respectively, marking one of the largest two-year gains in US stock market history.
Yet, having seen such stellar returns, asset allocators have begun to express caution. Most asset managers in their annual outlooks have said that they expect returns from the main index to be in the single digits this year, reflecting higher economic growth but a backdrop of increasing concerns.
These concerns were expressed in a recent note from Goldman Sachs, which pointed to three main factors which could act as a drag on stock market returns this year.
Firstly, most of the good economic news around taxation and deregulation from the incoming Trump administration has already been priced in and stock markets are therefore vulnerable to a correction if this disappoints.
Secondly, high valuations are likely to limit forward returns. Goldman Sachs notes that other markets are much cheaper relative to the US and their valuations are broadly in line with long-term averages.
Thirdly, the degree of concentration in US markets is unprecedented with the five biggest stocks accounting for roughly a quarter of the index.
The US bank also noted that rising bond yields, with the 10-year Yreasury yield having climbed above 4.5%, could weigh on equities if they rise further.
Against this background, Darius McDermott, managing director at Chelsea Financial Services, chose the BNY Mellon Global Leaders fund and the Morgan Stanley Global Brands fund for this week’s head-to-head article.
| BNY Mellon | Morgan Stanley | |
| Size | $167.6m | $20.8bn |
| Inception | 2016 | 2000 |
| Managers | Charlie Macquaker, Jane Henderson, Roy Leckie | William Lock, Anton Kryachok, Isabelle Mast, Marte Borhaug, Bruno Paulson, Alex Gabriele, Marcus Watson, Nic Sochovsk, Richard Perrott |
| Three-year cumulative return | 16.18% | 17.98% |
| Three-year annualised return | 5.59% | 6.33% |
| Three-year annualised alpha | -1.08% | 0.75% |
| Three-year annualised volatility | 17.62 | 14.64 |
| Three-year information ratio | -0.11 | -0.01 |
| FE Crown fund rating | ** | ** |
| OCF (retail share class) | 1.63% | 1.84% |
Investment approach
The BNY Mellon fund, which is managed by Walter Scott, is a high conviction, quality growth strategy, which invests in approximately 25 companies. The team focuses on companies with strong balance sheets, high rates of internal wealth generation and the ability to grow earnings over the long term, notes McDermott.
There are four stages to its stock selection process, comprising research, analysis by the regional team, the ‘Seven Sisters’ analysis, which challenges the key elements of a potential investment such as size, structure and cyclicality, and the final phase, which involves convincing the firm’s top executives.
Turnover is around 20% with the team targeting growth over seven to 10 years. The strategy has a healthy exposure to emerging markets, accounting for around 11.9% of its total investments compared with an average of 2.7% for the MSCI World index.
Meanwhile, the Morgan Stanley fund invests in quality companies with defendable and visible future earnings. It is also very concentrated with between 20 to 40 holdings. The managers look for companies benefiting from economies of scale and leading market distribution.
Every stock will also have to yield at least 1% in order to show commitment to minority shareholders. Stocks in the Morgan Stanley fund are bought with a four-year outlook, meaning turnover is around 25%, though positions will be topped and tailed, depending on their performance and attractiveness, notes McDermott.
In contrast to the BNY Mellon fund, the Morgan Stanley fund has the vast majority of its assets in developed markets due to its conviction on the higher levels of governance and liquidity there. On a sector basis, the BNY Mellon fund is more exposed to technology, healthcare and consumer discretionary, while the Morgan Stanley fund has greater exposure to financials and consumer staples.
Fund characteristics
Sector allocation:
| BNY Mellon | Morgan Stanley | ||
| Information Technology | 30.8% | Information Technology | 22.4% |
| Healthcare | 21.6% | Financials | 21.6% |
| Industrials | 15.3% | Consumer Staples | 18.3% |
| Consumer Discretionary | 12.1% | Industrials | 12% |
| Financials | 9.1% | Consumer Discretionary | 5.7% |
| Communication Services | 5.2% | Communication Services | 2.5% |
| Consumer Staples | 3.6% | ||
| Cash | 2.2% |
Top 5 holdings:
| BNY Mellon | Weighting | Morgan Stanley | Weighting |
| Mastercard | 5.4% | Microsoft Corp | 7.6% |
| Taiwan Semiconductor | 5.3% | SAP | 6.8% |
| Alphabet | 5.2% | Visa | 6.4% |
| Automatic Data Processing | 4.7% | Accenture | 4.1% |
| Microsoft Corp | 4.7% | Aon | 4% |
Performance
Both funds have underperformed the MSCI World index during the past five years, although that is unsurprising given the outperformance of a narrow list of US tech stocks during the past 18 months to two years.
“I would have no major concerns for either on performance; both are not pure growth plays, they target quality, long-term growth and this explains the slight lag on the MSCI World benchmark, which is dominated by those tech players at the top of the market,” said McDermott.
Discrete calendar year performance
| Fund | YTD* | 2024 | 2023 | 2022 | 2021 |
| BNY Mellon | 4.54% | 6.11% | 21.88% | -21.96% | 19.42% |
| Morgan Stanley | 3.85% | 9.04% | 16.44% | -17.38% | 22.3% |
Manager review
The BNY Mellon fund is helmed by Roy Leckie, Jane Henderson and Charlie Macquaker, all of whom have been with the business for roughly three decades.
They are supported by three research teams for Europe, the Middle East and Africa, Asia Pacific and the US, comprising six members each, many of whom have been in the business for more than 10 years.
The Morgan Stanley fund is led by a nine person investment team with William Lock having oversight. He previously worked in Credit Suisse First Boston’s Corporate Finance Group and as a management consultant at Arthur D. Little.
The other investment managers are managing directors Bruno Paulson, Nic Sochovsky, Marcus Watson and Alex Gabriele; executive directors Richard Perrott, Isabelle Mast and Anton Kryachok; and head of ESG Marte Borhaug.
Conclusion
Overall, McDermott notes that both funds focus on quality growth investing, although the BNY Mellon fund has greater exposure to growth stocks out of the two, while its focus on emerging markets also distinguishes it.
Meanwhile, the Morgan Stanley fund is slightly higher conviction, while he also notes that its 10-year return of 143% is hard to beat.
“If forced, I’d probably just side with the Morgan Stanley fund, but the focus on emerging markets makes the BNY Mellon portfolio a good alternative for those looking for access to a truly global portfolio,” he said.
