Fund Spotlight: beyond the S&P 500 with this active approach

Amid an environment in the US equity market where returns have been driven by a narrow set of mega-cap companies, few active managers have been able to outpace the S&P 500’s annualised return of more than 15% (in GBP-terms) over a decade. The market-cap weighted S&P 500 outperformed its equal weight counterpart by close to 12% in 2023 and again in 2024, demonstrating the narrow source of returns.

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However, the S&P 500 is also at historic levels of concentration both from a sector and a stock perspective. For every £1 of a S&P 500 ETF you buy, over 37 pence goes into the 10 largest companies, and around 47 pence into the top 20. US equity valuations are also historically high, which leaves these stocks with potentially far to fall if earnings disappoint or should external factors shock the market. Arguably, a simple market-cap weighted index brings with it a heightened level of risk compared to years past.

This isn’t a new perspective though, and investors are likely growing used to prophecies of the demise of “expensive” large-caps, only to see them continue to impress with their earnings and share prices.

However, it is certainly true to say that the current composition of the S&P underrepresents opportunities outside the largest companies, and outside the tech sector (nearly a third of the index).

Since Donald Trump’s 2024 re-election, in the wake of supportive policy reform and continued economic strength, market returns have broadened and earnings have impressed across sectors. The dominance of tech has given way to outperformance elsewhere, notably financials and banking sectors. The Magnificent Seven companies have begun to see more diverged returns, while the differential of returns between large and small/mid-cap has narrowed.

This creates an environment that may well reward those investors who look beyond the incumbent names that comprise the top of the index, and Neuberger Berman US Multi-Cap Opportunities is one such fund that is unconstrained in being able to seek opportunities from large/mega-cap down to small-cap. While still able and willing to selectively invest in mega-cap stocks, the portfolio also houses businesses of varying scale and from a diverse and differentiated set of sectors to capitalise on the true breadth of the US market.

What does the fund invest in?

Neuberger Berman US Multi-Cap Opportunities fund takes a flexible, bottom-up approach to investing in US equities. The objective is capital appreciation. A focused portfolio of 30 to 40 holdings is constructed by conducting fundamental analysis, with an emphasis on cash flow and capital-allocation decisions. The fund has been managed since inception in 2006 by the greatly experienced Richard Nackenson, who draws on NB’s immense analyst resource for idea generation and research.

The fund has more than 22% in stocks under $20 billion (£16 billion), compared with nearer 3% of benchmark and the current level of small-cap exposure (11%) has increased considerably since 2018.

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The manager also doesn’t have to conform to any one investment style. Rather the investment philosophy permits Nackenson to invest in stocks categorised as “Special Situations”, “Opportunistic” or “Classic”.

“Special Situations” (23% of the fund) refers to unloved businesses with unrecognised turnaround potential. An example here is Brookfield Corp Registered Shs -A- Limited Vtg (NYSE:BN), which management believe is well positioned to benefit from an uptick in transactions as previously suppressed capital market activity recovers.

“Opportunistic” (35%) companies are those that have become cheap due to reasons believed to be transitory. HCA Healthcare Inc (NYSE:HCA), a large US hospital operator, is seen as an “opportunistic” holding, but has shown strong returns on capital and positive earnings growth is expected.

Lastly,“Classic” (42%) refers to financially stable companies with strong management teams, diversified income sources and consistent long-term performance. Here, Nackenson cites T-Mobile US Inc (NASDAQ:TMUS), which has impressed in terms of revenues and cash flows, while also planning to return more than $14 billion to shareholders in the next year.

The bottom-up process gives a much-differentiated sector allocation. Financials represent the greatest weighting, at 22.4% of the fund (compared with 13.6% of benchmark), while the next largest allocation to technology of 18.8% (compared with 32.5% of benchmark) is the greatest underweight. Industrials (12.5%) and materials (8.9%) also represent overweight positions, while there is a significant underweight to healthcare (4.8%) and real estate (0%).

How has the fund performed?

Like most peers, Neuberger Berman US Multi-Cap Opportunities fund has not outperformed the S&P 500 over the past decade. Nonetheless, the fund has been in the top quartile and quintile of performers in its peer group over five and 10 years, still generating a pleasing absolute return.

Such a concentrated and all-cap approach as this, with no overwhelming stylistic bias either to growth or value, can provide a markedly different return profile to its large-cap and more growth-heavy benchmark and peers.

For example, while the fund lagged amid the US bull market of 2024, returning 22.8% versus nearer 27% for the S&P, in down markets such as 2022, the fund returned -6.7%, suffering less than the benchmark (-8.2%) and convincingly outperformed its peer group (-13%).

Interestingly, the fund’s strong absolute returns over the past five years, alongside the familiar Apple Inc (NASDAQ:AAPL), Alphabet Inc Class A (NASDAQ:GOOGL) and Microsoft Corp (NASDAQ:MSFT), can also be attributed to lesser-known names, e.g. HCA Healthcare, Brookfield, Eagle Materials Inc (NYSE:EXP) and BJ's Wholesale Club Holdings Inc (NYSE:BJ).

Source: Morningstar Total Return (GBP) to 31/01/2025. Past performance is not a guide to future performance.

Why do we recommend this fund?

The US equity market offers a huge breadth of companies across a myriad of sectors, whether they be domestically focused businesses standing to capitalise on America’s own resilient economy, or more internationally exposed global leaders.

The Neuberger Berman US Multi-Cap Opportunities Fund, a recent addition to ii’s Super 60 list of investment ideas, offers a way to capitalise on this diverse opportunity set at the hands of an experienced manager. The flexibility afforded to Nackenson allows him to invest in large, cash-generative mainstays, while also seeking out the opportunities on offer that are overlooked by other investors across differing pockets of the market.

The portfolio’s differentiation from a stylistic, size and sector perspective means that the fund could well benefit from a normalisation of the breadth of market returns across a broader set of stocks.

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The fund is also positioned with more emphasis on domestically focused stocks than its index, with around 68% of revenues coming from the US (versus under 60% for the benchmark). Should the new administration’s policy direction continue to be one of prioritising domestic growth, protectionism, and providing fiscal incentives for companies domiciled and operating in the US, this bias towards the domestic economy could prove advantageous.

The fund is one of the very best within its sector, having outperformed its flexible-capitalisation peer group over time and generating returns from recognising idiosyncratic investment opportunities across high-quality businesses often in areas of the market overlooked by others.

The fund is available with an ongoing charge of 0.99%.

The latest factsheet can be viewed here.