Last updated: 13:58 / Monday, 1 February 2016
The Cerulli Edge

European Investors in US Funds Find Compensation in a Strong Dollar, if the Product Is Unhedged

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European Investors in US Funds Find Compensation in a Strong Dollar, if the Product Is Unhedged
  • For a European investor in a US fund, there is compensation in a strong dollar, if the product is unhedged," says Barbara Wall
  • In the 12 months to November 2015, the S&P 500 barely edged into positive territory in dollar terms, but in euro terms, it soared 20%
  • The better active fund will distinguish between real buying opportunities and cases where there will be further pain

Managers of U.S. equity funds should look beyond short-term issues to see the opportunities, as the world's biggest economy continues to strengthen, while a soaring dollar looks set to benefit European investors, according to the latest issue of The Cerulli Edge.

While U.S. equity funds face headwinds in 2016 -including a potential 'risk-off' stance sparked by the run-up to the presidential election, further Federal Reserve interest rate hikes, and rich valuations- there are also positives to be found, says the document.

"Fed hikes may well further strengthen the dollar, making U.S. exports less competitive, which held back some companies in 2015. However, for a European investor in a US fund, there is compensation in a strong dollar, if the product is unhedged," says Barbara Wall, Europe managing director at the global analytics firm.

In the 12 months to November 2015, the S&P 500 barely edged into positive territory in dollar terms, underperforming European benchmarks. But in euro terms, it soared 20%. Allianz's Ireland-domiciled US equity fund, investing in standard names such as GE, produced a handsome return despite trailing the benchmark, notes Wall.

The trends edition points out that the US economy is well on the road to recovery and having created more than 10 million jobs in the past few years, can look forward to strong domestic demand, which will reduce reliance on exports. Economic woes elsewhere can only have so much of an effect, says Brian Gorman, an analyst at Cerulli, adding that the potential for investment in the U.S.'s aging infrastructure should prove positive for domestically focused industrial names.

"Stock-picking may be key if investors are to realize upside, while limiting downside if the market goes as badly wrong as some fear. Firms with well-established track records, that have been selling reasonably well, can hope to make further gains, especially if the turmoil sees some fall by the wayside," maintains Gorman.

He cites MFS Investments' U.S. Value Fund as one of the steadier performers since its launch in 2002, noting that while passive funds do pose a threat for actives, it is during trickier times that the latter earn their fees. "The recent pullback has made many companies look considerably cheaper. The better active fund will distinguish between real buying opportunities and cases where there will be further pain. Strongly outperforming funds abound, such as T. Rowe Price's Luxembourg-domiciled U.S. Blue Chip equity fund, with rewarding stock picks, notably in healthcare."

Acknowledging that China-inspired turmoil may see further outflows in equity funds in the early months of 2016, the firm believes that a strong U.S. economy will help to generate sustainable corporate profits, dividends, strong M&A activity, and share buyback programs.

"U.S. equity funds with decent records of picking the right stocks can hope to sell in Europe, given the lack of alternatives. The upside potential is clear, while the better funds can mitigate the losses during the tougher times. Managers should be using established channels to extol the virtues of U.S. equity funds, as well as pushing to appear on the growing raft of self-directed platforms," says Wall.

 

 

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