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What are we looking for?
Which U.S. equity funds are below the market index.
The screen
We looked for the bottom 15 performers among the many U.S. equity funds available in Canada for the year ended June 30. We wanted to see how gains made at the bottom of the barrel compared with the S&P 500 Composite Total Return Index, in Canadian-dollar terms. U.S. dollar, segregated and duplicate versions of the funds were excluded.
These funds invest 90 per cent or more of their equity holdings in U.S.-based securities.
What did we find?
Stock market gains, a rising U.S. dollar and improved investor confidence have made the United States a favoured investment destination for portfolio managers over the past several months.
Even the last-ranked U.S. equity funds for the period have performed well compared with many other fund categories in recent months. Only four funds fell below the S&P/TSX Total Return Index of 8.3 per cent in the year to June 30.
But the U.S. equity markets have soared far higher. This screen only reviews funds up to June 30, but the S&P 500 has continued to hit record highs through the summer. On Aug. 1, the index closed above the 1,700 mark for the first time. The Dow Jones industrial average has similarly performed well – up more than 24 per cent in the year to June 30.
Depending on their strategy, some of the bottom performers may be poised to take advantage of upcoming gains.
The Scotia U.S. Opportunities fund, for example, has Warren Buffett's financial conglomerate Berkshire Hathaway Inc. as its top holding with 5.7 per cent of assets allocated here. On Aug. 2, the company posted a second-quarter profit increase of 46 per cent thanks to its own investment gains and revenue growth. The stock made some gains on that news.
The Scotia U.S. Opportunities fund benchmarks the S&P 500 but is based on a "contrarian value approach" to investing, much like Berkshire uses. That means the funds looks for well-managed, quality companies trading at a discount. This strategy may not always rise with the markets.
That differs from the strategy of the screen's bottom performer, Dynamic Power American Currency Neutral Fund, which gained just 2.4 per cent in the year to June 30. The fund looks for earnings growth, which it closely links to stock price performance. Currently, the funds is heavily weighted toward information technology stocks at 47.4 per cent of the portfolio.
The Dynamic Power American Growth Fund also shows high allocations in information technology.