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Opportunities for US equities despite negative sentiment

The FE data shows that European funds with a focus on US equities had an overall return of 7.74% for the year to 22 January 2018, 12 months on from Trump’s inauguration.

The top fund, Edgewood L Select – US Select Growth A H EUR returned 33.37%, followed by Alger Sicav-Alger American Asset Growth (30.16%), Morgan Stanley – US Growth I (23.65%), Hereford – DSM US Large Cap Growth D (23.54%), and PGIM Jennison US Growth I Acc (22.88%).

All the funds had large holdings towards technology stocks including Apple, Amazon, Microsoft, Facebook, Visa, and the US stock of Chinese firm Alibaba.

The below chart illustrates the top five European US equity funds for the three years to 22 January 2018.

However, despite a picture of generally good returns, according to Expert Investor’s research team, over the past year sentiment towards the US remained firmly in the doldrums, with a big net negative sentiment from European fund selectors.

The data found the number of fund selectors increasing their US equity holdings has been on the decline since Q3 2017, and there has been an increase in selectors holding their US stocks since Q2.

According to the research, investors overall were universally bearish on US equities in 2017 and, while sentiment improved in a handful of European countries during the year, it only moved from very negative to negative.

The research found that during the first 10 months of 2017, more than €7.6bn net flew out of US equity funds. The largest outflows occurred in May, while June saw the lowest number of net buyers.

During the year, fund managers’ forward-looking performance predictors on US equities had steadily decreased and ended the year near its lowest point for 2017.

Government shutdown

AllianceBernstein said despite the US government’s current political stalemate, which has seen the parts of the government shutdown operations due to a lack of funding that could take a few weeks to resolve, this should not impact the long-term outlook for US equities.

The firm’s AB Select US Equity Portfolio manager, Kurt Feuerman, said a bigger issue was the planned corporate tax reforms which should help large and small domestic businesses with high tax rates.

“The tax legislation also aims to spur the repatriation of corporate cash from overseas. So, those companies with large overseas cash hoards are now able to access that cash by paying a discounted tax rate,” he said.

“This is great for large-cap tech companies, like Apple for example, who has $250 billion in cash overseas. In fact, Apple recently announced that they will be repatriating most of their offshore cash, resulting in a one-time $38 billion tax payment to the US government. ”

He noted that there were compelling opportunities in technology companies that were developing global growth platforms around data capabilities and firms such as Alphabet and Facebook were winners in this area.

The funds chosen for the top five lists in the chart above were created out of FE Analytics’ FCA Recognised universe and were domiciled in either Luxembourg or Ireland.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

Part of the Mark Allen Group.