Blending funds in the land of the free (and expensive)

The US is the world’s premier financial market, not least because of its immense scale, ingrained culture of innovation and enterprise, flexible labour markets, robust institutions and rule of law.

Its attractiveness has driven a decade of strong performance led by its eminent technology sector. This part of the market has traditionally been asset light, growth oriented and potentially volatile but the recent AI fervour has fuelled a period of profound performance by these companies. Today, however, the US market may pose challenges because of this focused outperformance leading to extreme concentration in its mega‑cap growth stocks, particularly those linked to Artificial Intelligence (AI). Their stretched valuations and shared characteristics (both positive and potentially negative) are difficult to ignore.

We believe diversification within US equities is essential given these concentration risks. True diversification within an equity region comes from differentiation: blending different investment styles, return drivers, market caps and industrial sectors so that portfolios are positioned to deliver their expected outcomes over the longer term. 

In the Liontrust Multi-Asset team, we begin our regional equity allocations by defining the overarching stylistic exposure we want through our manager selection. To give us long-term confidence that our desired blend will provide the characteristics we seek, we select managers who demonstrate the same discipline in their investment processes that we apply in ours. 

Managers must have a clear philosophy and process, appropriate resourcing to execute their strategies, and a structure that supports consistent, long-term decision making. There is no one-size-fits-all approach: different investment philosophies and processes require different staffing models and, crucially, mindsets. Growth-driven managers see opportunities in stocks that are in vogue; value managers see them in unloved areas of the market. 

Once we have selected our manager blend, we give them time to produce results. Manager outperformance, or ‘alpha,’ tends to arrive in irregular bursts. Blending multiple styles helps smooth these uneven payoffs because their performance cycles are imperfectly correlated, creating a combination whose overall utility is greater than the sum of the parts.

Inevitably there will be periods of underperformance. Our job is to understand why this occurs and judge whether our original investment thesis remains intact. This is supported by extensive research that integrates quantitative analysis with deep qualitative assessments.

Ultimately, we meet managers to ensure we can trust them to remain faithful to their investment processes. Style drift — when managers change their approach during challenging periods — can disrupt the balance of our overall blend. We therefore look for disciplined managers who apply their philosophy consistently, while adapting appropriately to market conditions.

Style blends

Our US equity allocations currently range from 5.9% to 32.0%, depending on the risk profile of each MA Fund and Portfolio. Each profile uses the same style mix to ensure consistency. These mixes are designed to capture the full breadth of the US index rather than concentrating too heavily in any single area but still allowing us to benefit from stylistic tailwinds as they emerge over the long term. However, we can still tilt allocations within each style towards attractive opportunities without sacrificing diversification.

We blend four styles, each of which plays a distinct role and outperforms at different points in the cycle. Currently, in the US we are tilted to overweight value, underweight growth and we are broadly neutral on quality and small caps. 

The overweight to value provides exposure to less expensive stocks rather than richly valued mega‑caps. Market leadership rarely remains concentrated indefinitely and moving down the market‑cap spectrum allows access to cheaper, less crowded opportunities. We are also firm believers that the small cap premium delivers over the longer term.

Our sector allocation reflects these convictions and those of our underlying managers. We are underweight information technology and overweight industrials, healthcare and financials. For example, we held 2.7% in Nvidia at the end of December compared with a benchmark weight of 7.3%, illustrating the reduced sensitivity to stock-specific and concentration risk.

Overall, we believe our MA Funds and Portfolios are well positioned for the US market environment that has been taking shape since last year. We maintain selective exposure to the AI theme but are not dependent on ever‑expanding valuations in a handful of stocks. Instead, we are positioned for a healthier market with more rational valuations and broader participation.

Our manager selections

For our exposure to growth stocks, or those expected to increase their earnings and revenue at a rate faster than the overall market, we blend Loomis Sayles US Large Cap Growth and Liontrust SF US Growth. 

Loomis brings a deeply fundamental, almost purist approach to quality growth, looking for companies with enduring competitive advantages, long runways for compounding, and management teams who it believes can deliver over five years-plus. It avoids paying for hype; in AI, its exposure is selective and valuation driven.

Liontrust SF US Growth brings a different flavour of growth. Its all-cap bias with a mid-cap leaning pushes the fund into less crowded areas of the market where innovation often happens earlier, and fundamental mispricing can be greater. Its sustainability framework steers it away from the mega-cap AI leaders dominating headlines, so performance drivers are structurally different from those of Loomis.

Together, these two strategies create a growth allocation with breadth and resilience: Loomis anchors the sleeve with high-quality long-term compounders and Liontrust injects dynamism, thematic exposure and mid-cap potential without relying on the Magnificent 7.

For our exposure to value stocks, we use BA Beutel Goodman US Value and FTGF Putnam US Large Cap Value. 

Beutel Goodman’s philosophy is resolutely valuation-driven, avoiding the temptation to follow momentum into expensive areas such as AI-adjacent names and focusing instead on businesses where fundamentals, balance sheet strength and downside protection create a margin of safety. Its current overweight to sectors such as healthcare reflects this long-standing discipline.

Putnam analyses a wider set of opportunities and offers exposure to companies at different stages of recovery or re-rating. Its broader participation across attractively priced sectors complements the deep value conviction of Beutel Goodman.

Another US holding, GQG US Equity, adds exposure to quality stocks, or those with strong fundamentals and durable long-term potential. The managers’ willingness to shift the portfolio opportunistically — most recently leaning towards more defensive stocks — reflects their philosophy of adapting to risk-adjusted opportunities. Although this repositioning has caused some short‑term underperformance versus the S&P 500, their unwavering priority is to protect and compound capital steadily rather than chase the latest market leaders.

for small-cap exposure we use CT American Smaller Companies. The managers run a deliberately focused portfolio reflecting their conviction-driven approach. Their process blends bottom‑up research with a strong valuation discipline: they seek businesses with durable competitive advantages, improving fundamentals, and management teams capable of compounding value over time. They see potential catalysts for a recovery: higher M&A interest, improving relative valuations and the prospect that earnings revisions for small caps could finally materialise after several muted years. Their optimism remains measured, but they believe that if fundamentals turn, sentiment could pivot quickly in favour of this under-owned part of the market.

In our Dynamic Passive funds and portfolios, we use HSBC American Index, Fidelity Index US and the L&G S&P 500 Equal Weight Index. The latter is particularly important in managing concentration risk. As the name suggests the equally weighted exposure provides the same portfolio allocation to all stocks in the index rather than following the market capitalisation convention of most passive investments.  This will inherently reduce the exposure to the largest name in the index and boost the allocation to smaller names. With index performance driven disproportionately by a handful of expensive mega‑caps, equal‑weight exposure helps ensure we are not overly dependent on them. This aligns with our view that concentration and stock-specific risks remain elevated and that market breadth should improve over time.

The summaries above provide a small taste of the depth of research and differentiation in the implementation of an actively different US equity exposure.  This is why we believe a blend of managers with complementary and offsetting stylistic characteristics provides a diversified and differentiated US exposure as part of our disciplined and Actively Different Multi-Asset process.