European institutional investors are beginning to put more faith in the U.S. to lift their equity portfolios.
In a move that goes hand in hand with the trend to invest globally over a strong domestic or regional bias, European pension funds and their equity managers are ratcheting up exposure to the U.S., according to consultants, managers and pension fund officials. And uncertainty surrounding the euro and its impact on eurozone economies is pushing investors faster into the arms of Uncle Sam.
“It's the first time in a long time that we're seeing (institutional investors in) Europe moving into U.S. equities,” said Martin Gilbert, Aberdeen, Scotland-based CEO of Aberdeen Asset Management PLC. “Obviously, what they like is the dollar. The dollar is perceived to be strengthening.”
European pension funds historically have underweighted U.S. stocks significantly vs. global benchmarks such as the Morgan Stanley Capital International World index, in which U.S. companies make up about 50% of the total market capitalization of developed countries. Although specific figures for the average European pension fund exposure to U.S. equity were not available, managers and consultants estimated the range at 15% to 35%.
Debbie Clarke, principal and global head of the equity research boutique at Mercer LLC based in London, said that during the past six to 12 months, she has noticed a clear shift in sentiment toward U.S. companies, particularly those with global reach. Consultants and managers said pension funds are mostly boosting their U.S. equity allocation through global strategies. Others are implementing new stand-alone U.S. equity mandates, while some are adding exposure through exchange-traded funds or synthetic overlays without significantly changing the underlying portfolios.
“This is a region where many have been persistently underweight for several years,” Ms. Clarke said. “Valuations, particularly (for) large-cap U.S. stocks, are looking more attractive. In addition, investors have been nervous about Europe. The euro has been under severe pressure, and there are questions as to how (European) companies will cope with that.”
In the five months ended May 31, the euro fell 14.6% against the dollar to trade at $1.23 from $1.44.
Diversification is another attraction. “Clients are adding U.S. equities not only as a way of diversifying out of the region, but also as a way to gain sector diversification,” said Kevin Ng, executive director and client portfolio manager in the fundamental equity team at Goldman Sachs Asset Management in London.
For example, the financial sector represents the largest portion of Europe's market capitalization, or about 25%. Meanwhile, technology comprises a very small portion. In the U.S., however, technology is one of the largest sectors, with many companies considered to be “global in nature so they are a good source of growth,” Mr. Ng said. GSAM had $840 billion in assets under management as of March 31.
However, Ms. Clarke added, “There are still significant risks (to increasing U.S. equities) related to unemployment and consumer spending, as well as (U.S.) government policies — for example, when will (the Federal Reserve) raise interest rates?”