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September 22, 2014

Monday Morning Memo: Do Fund Buyers Prefer Active or Passive U.S. Equities?

by Jake Moeller.

Lipper’s Jake Moeller uses Lipper sales data to examine how European fund buyers are gaining their exposure to U.S. Equities in August 2014.

Reuters /Gary Hernshorn

Reuters /Gary Hernshorn

Regardless of where one stands on the efficient-markets debate, most investors concur that the U.S. market is the most highly analysed and efficient global market. The dilemma for the fund selector when deciding to go down the active path is finding a fund manager who is able to consistently add value over time. Perhaps, reflecting this, over 600 different funds and share classes were used by European fund-of-funds managers to obtain their U.S. exposure in August 2014.

The dispersion of returns in the U.S. equity sector is lower than for other sectors. To the one year ended August 31, 2014, Lipper’s Global Equity–US sector returned 23.3% (all performance data are in euros). The highest performing fund, Conventum–Lyrical Fund S, returned 35.6% for the year and was written by two astute European fund-of-fund buyers. The worst performing fund, Credit Suisse Equity (Lux) USA Value R EUR,returned 11.2% over the year (and was written by one buyer).

Table 1. Quartile Dispersion of Funds within Lipper Global US Equities Sector (1 Year to August 31, 2014)

Source; Lipper, a Thomson Reuters company.

Source; Lipper

The most popular choice for European fund-of-funds managers, with 69 buyers, was an active fund, Robeco US Premium Equities I USD; it took 1.7% of the overall market for August 2014. It was followed by another active fund, Morgan Stanley US Advantage Z USD,which wasused by 49 fund buyers (1.7% of the market). Both of these funds only just outperformed the market. The first passive option, Vanguard S&P 500 UCITS ETF USD Inc, appeared fourth on the table and had 37 buyers. A total of 15 of the 25 most preferred U.S. funds by European buyers were actively managed.

Table 2. U.S Equities Funds Bought in August 2014 (in Europe) by Popularity.

Source; Lipper, a Thomson Reuters company.

Source; Lipper

Looking at fund popularity by size of assets, we get a slightly different picture. Of the top 25 funds 12 are passive options, with Vanguard US Equity Index GBP Acc taking first place (3.4% of the overall market). These 12 passive options constitute 20% of the overall U.S. equity exposure undertaken by fund buyers. Thus, it would appear that while many fund buyers are selecting active funds for their U.S. exposure, they are allocating higher average amounts to passive funds. Having a foot in both camps may well be a sensible option.

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