How simple is investing in the US stock market?

What you’ll learn:

• What are the FAANGs?
• How Aziz Hamzaogullari, Manager of the Loomis Sayles US Equity Leaders Fund, selects his investments
• How to invest in the US stock market.

During lockdown, many of us have learnt new skills, from cooking and DIY, to keeping up with Joe Wicks on YouTube. Some housebound investors have even turned their attention to buying and selling shares online. But how can investors in the UK understand more about how to invest in the US? Here, we talk to Aziz Hamzaogullari, Manager of the Loomis Sayles US Equity Leaders Fund, who shares his views on investing in the US stock market.

The FAANGs phenomena

Over the last few years, any armchair investor watching the meteoric rise of the FAANGs (Facebook, Amazon, Apple, Netflix and Alphabet – formerly known as Google) could be forgiven for thinking that investing is easy. Why, they might ask, should I pay a professional investor to manage my money when I can make a packet myself by investing in the shares directly.

These companies are amongst the largest in the world, so it’s little wonder that professional fund managers have bought shares in these industry giants. But there has also been a significant rise in ‘stay-at-home’ day traders, who bypass the professionals and place their savings in these companies, gambling on the belief that prices will continue to rise.

There is, however, a big difference between an armchair enthusiast investing in single stocks and a professional investor adding single stocks to a fund portfolio of multiple stocks. The old adage of ‘a rising tide lifts all boats’ applies here, because while the risk doesn’t seem obvious when everything is moving ever upwards, it becomes rather more acute when it all starts to go south.

In a nutshell, taking extremely concentrated positions is a great way to make a ton of money while short-term investor sentiment favours these companies. But it is also an easy way to go broke because the tide inevitably recedes. Unlike the tides, however, we cannot predict when investor sentiment will shift.

How can a professional avoid this?

Aziz Hamzaogullari is one such professional investor – he manages the Loomis Sayles US Equity Leaders Fund. He and his team spend their time understanding the quality of every single company by employing a time-tested strategy for deciding if it is structured appropriately for future growth.

Science and art

Of course, this approach requires patience, skill and research. The US stock market is regarded as one of the most over-researched markets in the world. There are thousands of analysts all looking at the same information. But what can you understand about a company that gives you an edge over your peers, if you are all simply analysing the same data?

Aziz talks about looking at the information differently. As a growth manager, his starting point is understanding whether the companies are what he describes as ‘good quality’. His research framework helps him discern and develop insights as to whether a business meets his key investment criteria – a process that is part science, part art. The science part involves slicing and dicing publicly available information, such as revenues, profits and cashflow. This is the publicly available information. But the ‘art’ comes into play when understanding factors that can’t always be quoted in numbers.

Assessing the long-term thinking of a company’s management team is a good example. As a long-term investor, Aziz will have met the management teams of all the companies he is invested in and all the companies he is considering investing in, and will know each and every one of them inside out. He proactively engages them regarding the company’s ability to generate long-term shareholder value – certainly not something that a private investor can do, who is usually restricted to just analysing the numbers!

Are there many ‘high quality’ companies?

According to Aziz, no. Just a tiny fraction of the overall US stock market meet this investment criteria.

“We seek high quality businesses where it is very difficult or impossible for someone else to replicate what they do,” explains Aziz. “That business must also have strong management and have the ability to deliver strong returns for at least 10 years into the future. Unfortunately, 99% of businesses do not fit this – we are looking at the 1% that do.”

The sustainable and profitable growth Aziz is looking for is also rare. Empirical evidence shows only 10% of companies can sustain above-average growth rates over a four year period. With an average portfolio holding period of nearly eight years, Aziz’s selected businesses exceed this time frame.

And once those high quality and sustainable growth businesses have been identified, professional managers like Aziz wait until the short-term investors overreact to the market noise and drive down the share price. This gives Aziz an opportunity to invest in the shares of those companies at a discount.

A patient investor, all aspects of his investment thesis – quality, growth, and valuation – must be present simultaneously for him to invest. “We want to buy high quality businesses at a substantial discount to what we believe they are worth,” says Aziz. “Finding them is very rare – on average we tend to buy only one or two companies each year.”

In short, investing is all about being very selective in what you invest in and making sure you pay the right price. As it happens, Aziz’s team has been investing like this since 2006.

How to invest in the US

The Loomis Sayles US Equity Leaders Fund is one of three actively managed funds on the Barclays Funds List that invest in the US, each of which have a very different approach to investing. The other two funds on the Funds List which you may also like to consider are the Findlay Park American Fund and the JP Morgan US Equity Income Fund.

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection? 

Alternatively, there are many passive investments available, such as tracker funds and exchange traded funds (ETFs), which simply track the performance of the US stock market at a relatively low cost.

However, it is important to remember not to put all your eggs in one basket. To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone. 

Whichever option you choose, or whether you decide to invest in both active and passive funds, you must accept that all investments can still fall in value as well as rise and you might get back less than you invest.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Find out more about our Ready-made Investments.