WealthWhys: Anita Patel, investment specialist at Capital Group

“Typically, when you get broadening earnings growth, that does start to translate into broadening equity markets in the US,” she explains. “And we are seeing tentative signs of that in the US, with the S&P500 equal-weighted index outperforming the largecap index.”

Patel’s concern, though, is that most investors are not positioned for this next market phase on account of US exposure largely coming through passive allocations. “Investors are currently worried about geopolitical uncertainty, market concentration and expensive valuations,” she says.

“We have had fears of an AI bubble and we also have the midterm elections in the US in November. So now would be an opportune time to consider an active approach, alongside existing passive exposure to the US, and look for a strategy that can balance capital growth and preservation – one that can help clients balance risk-reward outcomes in the US going forward.”

‘Consistency and resilience’

This brings Patel to Capital Group’s flagship US equity strategy, Investment Company of America, which was launched in 1933 and for which she makes three arguments. “The reason this is a credible proposition for clients is, first, it captures the breadth of the US economy, underpinned by bottom-up fundamental research,” she begins.

“This is becoming increasingly important, when valuations are expensive and there are pockets of froth in the market – but also when there is increased scrutiny on company fundamentals. Second, through its active core and diversified portfolio, it is well-positioned as equity markets broaden so we are able to achieve diversified sources of alpha.

“And then, third, the fund and the broader strategy has delivered a strong track record of consistency and resilience. We have been able to deliver superior excess returns versus the index through a combination of upside capture and downside resilience – and we have achieved this pattern of returns by not taking on too much volatility compared to the market.

“This is a pattern of returns we have delivered historically over the strategy’s nine-decade track record; it is the pattern of returns we have delivered over the last three and five years; and it is also the pattern of returns we expect to deliver going forward.”

Why should investors have exposure to US equities in general?

The case for US equities – and the US in general – continues to be quite robust and that is because, over the last six or seven decades, the country has developed a compelling formula for enduring, long-term economic growth. But it has also created an environment that has been particularly rewarding for shareholders – and that is why the US continues to be a core allocation in client portfolios.

Recently, investors have been questioning whether the US can continue its leadership – whether the factors of US exceptionalism still hold, or are they broken? We believe those factors are still enduring and it is because they are structural – the scale, the deep, liquid capital markets, the less regulation, a concentrated pool of talent, academia, innovation, a really strong start-up culture and a record number of IPOs happening in the US.

There is also the fact the US has a large domestic population of 300 million people willing to try new products and services – and that almost creates network effects because these businesses can scale locally before turning into global businesses. So these factors have led to superior productivity growth and earnings growth compared to other developed markets.

Importantly, investing in the US is not confined to the Magnificent Seven – even if that has very much been the story over the last three to five years – or to AI. Instead, there are a breadth of opportunities in the US – and that requires an active and diversified approach to access them.

Why should investors consider this strategy ahead of its peers?

First, Investment Company of America is Capital Group’s flagship US equity strategy. Launched in 1933 and with a 92-year track record, it is one of the oldest mutual funds in the world today.

The reason Investment Company of America is a credible proposition for clients going forward is it captures the breadth of the US economy, underpinned by bottom-up fundamental research. This is becoming increasingly important, when valuations are expensive and there are pockets of froth in the market – but also when there is increased scrutiny on company fundamentals.

Second, through its active core and diversified portfolio, it is well-positioned as equity markets broaden. The fund has structurally been underweight the Magnificent Seven and the tech sector yet it has outperformed, despite being underweight those two areas of the market – highlighting that is not dependent on the Mag Seven to be the key driver of its absolute and relative returns.

So we are able to achieve diversified sources of alpha – and then, third, the fund and the broader strategy has delivered a strong track record of consistency and resilience. We have been able to deliver superior excess returns versus the index through a combination of upside capture and downside resilience – and we have achieved this pattern of returns by not taking on too much volatility compared to the market.

So we really have outperformed with lower volatility and so balanced those risk-reward outcomes that we can deliver for our clients. And this translates into attractive peer group rankings within Morningstar’s US Large Cap Blend category, where the fund is top-decile over three and five years – and on a Sharpe ratio basis, it is also top-decile over three and five years.

This is the pattern of returns we have delivered historically over our nine-decade track record; it is the pattern of returns we have delivered over the last three and five years; and it is also the pattern of returns we expect to deliver going forward.