Interactive Investor

The US funds beating the S&P 500 over the short and long term

10th June 2022 09:54

Kyle Caldwell from interactive investor

The S&P 500 is tough to gain an edge on, but our research finds there are some funds that have consistently beaten the index. 

The S&P 500 index is notoriously difficult for fund managers to consistently beat, given that it is the most widely researched and followed index.

Gaining an edge has been a tougher challenge over the past couple of years due to a handful of stocks – the big tech giants – dominating the performance of the index. The four largest stocks in the S&P 500 represent just under a fifth of that index: Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN)

While it is true that most US active funds do tend to underperform over short and long-term periods, some active funds have delivered.

Using data from FE Fundinfo, interactive investor crunched the numbers to see which US funds outperformed the S&P 500 index over one, three, five and seven years (all figures to 22 May 2022). We used the Investment Association’s (IA) North American sector, which seven years ago contained 111 active funds.

Over seven years, we found that 53 of the 111 funds had beaten the index, so just under half. Of those 53 funds, the number fell to 44 when the five-year time period was included.

When the two shorter time periods were introduced, the number of successful funds dropped sharply, with 29 funds managing to maintain an edge over three years. Of those 29 funds, only 10 had also managed to beat the S&P 500 over one year.

We ran the same exercise just over a year ago. At the time, more funds were successful: a total of 24.

As with our research last year, it is worth pointing out that this does not take into account survivorship bias. Seven years ago, there would have been more than 111 US active funds in the sector and some have closed, while others merged.

In a number of cases, as the table below shows, as well as demonstrating consistency across those four time periods, a number of funds have outperformed notably over the long term.

Therefore, gains in excess of the S&P 500 and passive strategies tracking the index can be achieved. The trade-off, of course, is that most US active funds did not consistently gain an edge over both short and long time periods.  

US active fund winners 

Fund Seven-year return (%) Five-year return (%) Three-year return (%) One-year return (%)
BlackRock US Dynamic 161.4 87.4 49.2 8.3
JPM US Select 161 90.3 51.1 7.7
HSBC US Multi-Factor Equity 157.9 89.8 49.7 12.2
Royal London US Equity Tilt 152.4 83.1 44 6.8
Schroder QEP US Core 150.6 83 45 9.4
AB Select US Equity Portfolio 147.5 82.9 45.5 9.3
IFSL Marlborough US Multi-Cap Income  142 85.7 38.7 6.8
Threadneedle US Equity Income 139.1 78.2 44.4 14.4
BMO North American Equity 136.8 77.5 40.7 11.8
Scottish Widows American Growth 133.6 73.8 42.6 9.6
S&P 500 Index (sterling return) 128.2 70.1 38.7 6.6

All data to 22 May 2022. Source: FE Fundinfo. Past performance is not a guide to future performance.

Potential downsides of passives as tech runs out of steam

Up until six months or so ago – when the market rotation away from high-growth shares and towards value shares started to gather pace ­­– the strong performance of big tech benefited investors in exchange-traded funds (ETFs) and index funds. As the stocks went up, so did their weightings in the index, including Facebook, now called Meta Platforms (NASDAQ:FB).  

For active funds, the heavily skewed performance of big tech has proved a headwind for those “underweight” those companies.

Going forward, while it is early days, expectations are that there will be a broader set of companies influencing the performance of the index in response to high inflation and increases in interest rates. Given this market backdrop, such companies are less attractive for investors to own, and this gives active fund managers an opportunity to prove their worth.

Index funds and ETFs, due to their weighting towards stocks that have already seen strong share price rises, have greater weightings towards higher-priced stocks and lower weightings to stocks that are cheaper and potentially underpriced. This is the main downside of the market-cap weighted index, which is the approach that most passive funds follow.

Aside from active funds, another option is picking an index fund or ETF that follows an equally weighted index. This means that each member of the index accounts for the same percentage. So, in an index of 100 stocks, each would receive a 1% weighting. Several index providers offer these, and one example is the Xtrackers S&P 500 Equal Weight ETF (LSE:XDEW).  

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.