T ROWE PRICE US SMALLER COMPANIES EQUITY FUND: Forget the Magnificent Seven

When UK investors think about US equities, their minds tend to focus on the big American tech companies that continue to thrive on a global stage while delivering (in most cases) exciting shareholder returns.

Already this year, the share prices, in dollar terms, of Amazon, Nvidia and Meta – all members of the ‘Magnificent Seven’ gang of leading US stocks – have risen by 22, 85 and 46 per cent respectively. 

Yet there are some investment experts who believe the time may be right for investors to think outside of these big world leaders and look elsewhere for value. Among them is Maryland-based investment house T Rowe Price.

With interest rate cuts on the way and inflation falling, this independent asset manager – with more than $1.4 trillion (£1.1 trillion) of funds under its belt – argues it is time for investors to consider the appeal of smaller companies.

In simple terms, it is of the opinion that some of the country’s tech giants are overvalued on the stock market – while many smaller companies are unloved, undervalued and ready for a share price bounce-back.

‘We are in some ways where the US market was in 1973,’ says Michele Ward, a US equity portfolio specialist with T Rowe.

‘Back then, we had inflation issues, rising energy prices, war in Vietnam and political instability back home – and the stock market took a big hit as expectations about what the big companies could deliver got overblown.

‘But it resulted in US smaller stocks then going on to outperform for the next decade. It feels like we are now in similar territory.’

The T Rowe Price US Smaller Companies fund primarily invests in US companies that form part of the Russell 2500 – an index comprising smaller and mid-cap stocks. ‘It’s where the likes of Tesla and Starbucks started,’ says Ward. ‘For investment managers there are lots of opportunities to make alpha (excess) returns.’

If the market value of a stock means it outgrows the Russell 2500, the fund will continue to hold it provided there remains the chance to make money on the investment. ‘We’ve owned aggregates company Vulcan Materials for eight years,’ says Ward. ‘It has a market capitalisation of $36 billion, double the largest constituent in the Russell 2500.

‘But it remains a quality business that has quarries located in 22 states and has tremendous pricing power. We will hold it for some time to come.’

The fund currently has around 175 holdings and it is deliberately invested across all of the market’s key sectors. Individual holdings rarely exceed two per cent of the fund’s assets with profits taken if they do.

For example, Molina Healthcare represented 2.4 per cent of the portfolio in late 2022, but the stake has now been trimmed back so that the holding sits among the top 15.

Over the past one, three and five years, the fund has comfortably outperformed the average for its North American smaller companies peer group with respective returns of 19, 19 and 80 per cent.Ward says the company’s ability to deliver ‘alpha’ is in part a result of having ’50 sets of feet on the street’ (analysts) looking at investment opportunities.

‘Between them,’ she adds, ‘they held more than 2,300 meetings with companies last year, gaining a big insight into what companies to buy, sell or avoid.’ The £266 million fund has competitive annual charges, totalling 0.95 per cent. It does not pay a dividend.