Despite predictions of a possible recession in the US, the world’s biggest economy has been more resilient than expected since the beginning of the year.
The S&P 500 index has gained almost 4% year to date, while consumers continue to spend amid higher prices and interest rates and the job market remains strong.
All these factors coupled with the uncertainty of the Federal Reserve’s stance on when to loosen its monetary policy has stirred mixed views on what is the best investment strategy for US equity funds to generate returns.
Speaking at their market outlook meetings at the end of 2022, many asset managers said they would rather bet on the emerging markets such as China.
Against this background, FSA asked Michael Born, investment research analyst at Morningstar, to select two North American equity funds for comparison. He chose the Fidelity America Fund and the Natixis Loomis Sayles US Growth Equity Fund.
| Fidelity | Natixis | |
| Size | $3.90bn | $2.02bn |
| Inception | 1990 | 2016 |
| Managers | Rosanna Burcheri, Ashish Bhardwaj | Aziz Hamzaogullari |
| Three-year cumulative return | 9.60% | 6.80% |
| Three-year annualised return | 7.73% | 5.34% |
| Three-year annualised alpha | 2.87 | 0.86 |
| Three-year annualised volatility | 22.60% | 24.23% |
| Three-year information ratio | 0.20 | 0.06 |
| Morningstar star rating | *** | *** |
| Morningstar analyst rating | Neutral | Bronze |
| FE Crown fund rating | **** | ** |
| OCF (retail share class) | 1.88% | 1.80% |
Investment approach
Despite both funds focusing on US equities, the investment processes for both funds are quite different when it comes to stock picking.
The Natixis fund is a growth-focused fund and looks for three major characteristics in companies: quality, growth and valuation.
Through a seven-step framework, the investment team reviews competitive advantages, industry analysis, financial analysis, management, sources and sustainability of profitable growth, intrinsic value and expectation analysis when choosing companies.
“Overall, the team is trying to identify firms that have difficult-to-replicate business models and competitive advantages such as a network effect, low-cost advantage or a strong brand,” said Born.
The Natixis fund is slightly more concentrated compared with the Fidelity fund, with a portfolio of 30 to 40 stocks.
Yet, Born observed that the stock allocation has not changed much from year to year and individual stakes can be sizeable but limited to 8% of the portfolio.
“A long investment horizon is reflected in the fund’s low turnover of less than 20%. It tends to have a high active share and sector weightings can deviate significantly from the Russell 1000 Growth Index’s.”
“The focus on quality and growth has been consistent and the strategy’s return-on-equity has been above that of the US large-growth peers,” Born added.
He also noted that the portfolio has also had one of the largest stakes in wide-moat stocks in the category, with typically 75%-80% of the fund’s net asset value allocated to these stocks.
The fund manager prioritises diversification of the portfolio’s underlying business drivers. Online advertising, enterprise IT spending and e-commerce are among the top drivers.
“Overall, the team is trying to identify firms that have difficult-to-replicate business models and competitive advantages such as a network effect, low-cost advantage or a strong brand.”
Michael Born, investment research analyst, Morningstar
On the other hand, the Fidelity America fund is a traditional US value offering.
“The focus is on companies that have typically gone through a period of underperformance, where the market is undervaluing their recovery potential and there is strong relative upside/downside potential,” said Born.
The portfolio tends to consist of around 35 to 50 names with a strong value tilt and mid-cap bias.
He also observed that the fund tends to have limited exposure to utilities and REITs, while overweighting in technology, financials and healthcare.
“Within technology, the managers prefer a number of mature companies such as Oracle, Cisco and Check Point, which they see as having strong competitive positions and balance sheets,” Born said.
“In financials, they own diversified financial services group Morgan Stanley and counter-cyclical investment businesses Berkshire Hathaway and Fairfax Financial. Within banks, they like Wells Fargo for its restructuring potential and a significant discount to book value, as well as US Bancorp.”
Fund characteristics
Sector allocation:
| Fidelity | Natixis | ||
| Health Care | 19.9% | Information Technology | 35.4% |
| Financials | 13.2% | Communication Services | 18.7% |
| Industrials | 11.8% | Consumer Discretionary | 15.2% |
| Energy | 10.2% | Health Care | 13.9% |
| Consumer Staples | 7.9% | Industrials | 8.9% |
| Information Technology | 7.5% | Consumer Staples | 3.7% |
| Communication Services | 7.1% | Financials | 3.5% |
| Utilities | 6.2% | Cash & cash equivalent | 0.7% |
| Materials | 5.4% | ||
| Consumer Discretionary | 3.2% | ||
| Real Estate | 2.1% |
Top 5 holdings:
| Fidelity | weighting | Natixis | weighting |
| Berkshire Hathaway | 4.4% | Visa | 6.5% |
| Baker Hughes | 4.3% | Boeing | 6.2% |
| Mckesson | 3.7% | Alphabet | 5.9% |
| Elevance Health | 3.6% | Nvidia | 5.4% |
| Wells Forgo &Co | 3.5% | Meta Platforms | 5.4% |
Performance
Looking at a three-year investment horizon, both funds have posted positive double digit returns over the period.
The Fidelity fund generated a 22.55% return over a 36-month period, while the Natixis fund’s return was at 14.41%, compared with a sector average return of 15.35%.
“Given the valuation focus here, the Fidelity America strategy is expected to perform well in a value-led, counter-cyclical environment such as 2022 and struggle in high-growth or momentum-driven market environments such as 2019,” said Born.
The strategy is differentiated from many other US equity offerings given its value tilt, mid-cap bias and absence of FAANG holdings.
“Over 2022, we saw the fund outperform both the S&P 500 as well as its Morningstar US large-cap value peer group following several years of underperformance, whilst its value style was out of vogue,” he added.
“Given the valuation focus here, the Fidelity America strategy is expected to perform well in a value-led, counter-cyclical environment such as 2022 and struggle in high-growth or momentum-driven market environments such as 2019.”
Michael Born, investment research analyst, Morningstar
On the other hand, the Natixis Loomis Sayles fund tends to outperform when quality growth does well and when investors are willing to pay up for more expensive names.
“This fund may trail in sharp up markets such as when pro-cyclical value companies lead during an early economic expansion or during environments which favour traditional value sectors such as rising inflation, but should generally hold up better than peers in downturns,” said Born.
When looking at the latest 12 months performance, both funds have demonstrated better resilience during market downturns compared with the sector average. The Fidelity and Natixis funds posted returns of -4.78% and -7.14% respectively over the last 12 months, while the North America sector average was -7.40%.
The Natixis fund recovered well in 2021 after the March 2020 trough, but Born noticed that 2022 has been a tough year with the fund underperforming both the benchmark and the Morningstar US large-cap growth peer group.
“Although disappointing, this is somewhat to be expected as the market aggressively sold down many of the technology and telecom names to which the fund was heavily invested,” he said.
“Performance over this period was very much in-line with our expectations given the emphasis on quality names.”
Discrete calendar year performance
| Fund/Sector | YTD* | 2022 | 2021 | 2020 | 2019 | 2018 |
| Fidelity | 1.33% | -5.50% | 24.22% | 3.96% | 10.87% | -6.87% |
| Natixis | 11.82% | -28.72% | 17.18% | 28.88% | 29.81% | -3.64% |
| Equity – North America | 5.23% | -21.67% | 22.25% | 18.89% | 27.80% | -7.90% |
Manager review
The Natixis Loomis Sayles fund is managed by Aziz Hamzaogullari, who is an experienced manager with a strong supporting team.
He has over 25 years of investment experience and founded this US large-cap growth strategy at Evergreen in 2006.
He has successfully managed it for 14 years first at Evergreen and then since May 2010 when he moved to Loomis Sayles.
Commenting on the team support, Born noted that the supporting team is loyal and stable and consists of seven sector analysts, three of whom have worked with the manager since 2006.
It is also the case that all the analysts were rigorously and patiently trained by Hamzaogullari and no analyst has left while Hamzaogullari has been at Loomis Sayles.
Meanwhile, the Fidelity America fund saw a manager change in May 2021 when Angel Agudo decided to step down from portfolio managerial duties after 16 years at the company.
Rosanna Burcheri has since taken up the role of lead manager, together with Ashish Bhardwaj, who has been an assistant manager since June 2019.
“The team will continue to be supported by the group’s dedicated US equities team of 32 analysts, based in London and Toronto, as well as four pan-regional analysts who also cover US stocks,” Born noted.
“The team is a mixture of experienced career and junior analysts, organised by sector.”
Conclusion
Both the Fidelity and Natixis products received three stars from Morningstar, whose rating is based on historical returns.
Meanwhile, the forward analyst rating for the Fidelity fund is neutral, while the Natixis product got a bronze rating.
FE Fundinfo, which bases its assessment on a fund’s three-year history of delivering alpha, minimising relative volatility and producing consistent returns, awards the Fidelity fund four crowns, but only two crowns to the Natixis product.
When asked to compare the two products, Born said he has no preference on either fund but they can be paired together to achieve core US equity exposure, given Loomis Sayles’ quality growth approach and Fidelity America’s value tilt, mid-cap bias and absence of FAANG holdings.
“These are two different styles of investing, although we have a higher rating on the Loomis Sayles given experience and stability of the team, as well as a methodical and research-intensive process that has been proven through time,” he said.
“Fidelity America has recently seen a lead manager change, which creates uncertainty.”
