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European fund selectors rethink merits of US equities

Luxembourgian and French fund buyers lead revision of asset class’s prospects as Federal Reserve cuts rates to boost growth

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David Robinson

Pan-European fund selector sentiment towards US equities suffered a modest quarter-on-quarter decline from Q2’ 18 to Q1 ’19, according to Last Word Research, as investors weighed up the negative impact of the China-US trade war and the risk of a global slowdown.

However, US equity funds saw an uptick in buyers in Q2 this year – particularly in Luxembourg, France and the Netherlands – suggesting a gentle shift in attitudes towards the asset class. Last Word surveys hundreds of fund selectors across Europe every quarter to gauge forward-looking buying intentions.

Moreover, US equities recorded the largest quarterly shift in net sentiment in Q2 out of 26 asset classes.

The shift is reflected in fund flows. Net fund flows for the first five months of this year (Jan’19 – May ’19) amounted to a total outflow of €9.2bn. But June bucked the trend with €1.8 inflows.

Yesterday, the US Federal Reserve cut interest rates for the first time since the financial crisis, slashing US borrowing costs by a quarter point, in a bid to boost sluggish inflation and stave off the risk of possible economic downturn. The benchmark S&P 500 index rose more than 10% during June and July, reflecting the widespread anticipation of the cut.

Luxembourg leads way

Luxembourgian fund selectors were particularly keen on US equities in Q2. It was the most popular asset class with just under half of investors looking to buy. “Luxembourg is much more international than other countries in Europe in its outlook,” said Jan Lecluyse, a fund selector at Fuchs Finance in Luxembourg.

Appetite for US equities surged among Luxembourgian fund selectors in Q2

“There are different factors why people should be optimistic about US equities. Unlike Europe, you have earnings growth visibility in the US, and entrepreneurship is supported, and 70% of GDP in the US is driven by consumption.”

US economic growth cooled to a better-than-expected 2.1% in Q2 on the back of robust consumer spending.

“Many US companies’ results posted second quarter results than were expected. People have been too negative on US equities. In many sectors the disruption and innovation which is stimulating entrepreneurs is found in the US,” Lecluyse added.

US equities were the most popular asset class out of 26 for Luxembourgian fund selectors in Q2

Lecluyse said he preferred small caps over large caps for US equities, and growth over value. He cited the Alger Small Cap Focus Fund, which focuses on small cap US equities. “It’s a nice product with an overweight towards high tech and biotech,” he said.

Alger Small Cap Focus fund vs benchmark (three-year performance)

Fed has more firepower

French fund buyers also displayed an improvement in sentiment towards US equities in Q2. “We love US equities,” said Pierre Bismuth, the managing director of Myria Asset Management, a Paris-based multi-manager and fund host. “In terms of growth stocks, all the best opportunities are in the US.”

Appetite for US equities rose among French fund selectors in Q2

Bismuth contrasted the sluggish economy in Europe and the limited options available to outgoing ECB president Mario Draghi to spur the eurozone economy, compared to wide-ranging and aggressive monetary policy options open to US Federal Reserve chairman Jay Powell to stimulate US growth.

The US Federal Reserve cut short-term interest rates by a quarter point yesterday – lowing its federal funds rate to a range of 2% to 2.25% – which leaves the US central bank with plenty of room for further manoeuvre if necessary.

The European Central Bank, meanwhile, left rates unchanged at its governing council meeting in Frankfurt last week but indicted that it intended to cut in rates in September, together with a resumption of its quantitative easing programme. But with the benchmark rate at zero and the deposit rate at minus 0.4% the ECB’s wiggle room is limited.

Just under half of Myria’s Capital Planète global equity ‘fund of funds’ is invested in US equities via growth funds such as Seilern Stryx America and Polen Capital Focus US Growth, meaning it has a lot of exposure to high-profile US tech stocks such as Alphabet, Facebook and Adobe.

Bismith cited the performance of Microsoft, which has seen its stock price increase 35% in dollar terms this year on the back of surging revenues from its cloud services business.

Appetite for US equities is up sharply among Dutch fund selectors this year.

Dutch sentiment towards US equities also up

Top performing funds

The best performing large cap US equities funds end-June this year were Alliance Bernstein Concentrated US Equity (+28.47); Sands Capital US Select Growth (+28.11), Morgan Stanley Investment Fund’s US Growth fund (+27.42), and PrivilEdge Sands US Growth (+27.13), according to Morningstar. All results are denominated in euros and all funds are available to European investors.

Top performing US equities funds 

Alliance Bernstein Concentrated US Equity’s top holdings include Microsoft (9.65%), Mastercard (8.76%, Abbott Laboratories (8.17%), IQVIA Holdings (7.23%) and Charles Schwab (6.23%).

Sands Capital US Select Growth fund’s top holdings include Amazon (8.6%), Visa (8.22%), ServiceNow 7.19%, Netflix (6.06%) and Alibaba group (6%). Chinese conglomerate Alibaba is listed on the New York stock exchange.

Morgan Stanley Investment Fund’s US Growth fund top holdings include Amazon (7.93%), Illumina (5.45%), Twilio (5%), Intuitive Surgical (4.91%) and Spotify (4.7%).

PrivilEdge Sands US Growth fund’s top holdings include ServiceNow (8.4%), Amazon (8.21%), Visa (8.18%), Netflix (6.28%) and Alibaba group (5.6%), according to FE Analytics.