Vanguard defends dominance of US equities in EU-domiciled funds

Vanguard has defended the dominance of US equities in European investors’ passive fund portfolios in the face of growing criticisms from EU asset managers and policymakers that listed companies in the bloc are missing out on investment.

Sandro Pierri, president of the European Fund and Asset Management Association, said last month the rise of passive investing has the “unintended consequence” of benefiting US corporates over those in the EU.

His comments follow those of high-profile EU adviser Enrico Letta, who has said there is “a concerning trend” of European savers’ money being diverted “towards the American economy and US asset managers”.

AFG, the French asset management trade body, has voiced similar views, publishing a “manifesto” for EU capital markets in February, which states that the bloc should encourage “home bias” among retail investors.

This article was previously published by Ignites Europe, a title owned by the FT Group.

The US represents around 70 per cent of the global equity market, resulting in a significant portion of passive fund assets being invested in US companies.

In addition, dedicated US funds account for almost 30 per cent of all ETF and index fund assets in Europe, considerably higher than for dedicated European funds, Morningstar data shows.

Pierri, who is also chief executive officer of BNP Paribas Asset Management, said: “We’re taking savings from the EU to basically finance a US company that then might end up taking over European companies.”

“We need to make sure that we understand fully the implication of pushing too much into passives,” he told the TradeTech Europe conference in Paris.

However, passive fund group Vanguard said Europeans’ investment in US equities instead of other stocks was “fundamentally an asset allocation decision”.

“Investors are using index funds and ETFs actively to express a particular view and consequently fine-tune their portfolio asset allocation to meet their investment goals,” a Vanguard spokesperson said.

When investors use index or exchange traded funds for a particular allocation, the picture is “more nuanced than simply buying a total market index fund”, they add.

“Instead of investing on a pure market capitalisation basis, investors are increasingly using low-cost index ETFs, which track subcomponents of the total market, to build strategic, globally diversified portfolios,” the spokesperson said.

Monika Calay, director of UK manager research at Morningstar, agreed, saying: “Investors should have the freedom to decide where they want to allocate their hard-earned money based on their individual goals and risk tolerances.”

The current investment landscape offers a “wide array” of funds providing exposure to European equities, giving investors “ample opportunities” to access the asset class and construct well-diversified portfolios aligned with their specific needs, she said.

“Policymakers should focus on ensuring transparency and investor protection, while allowing the market to meet the diverse demands of investors,” Calay added.

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Amin Rajan, CEO of Create-Research, an asset management consultancy, added that “there is nothing that policymakers can do” if European passive fund investors want to have exposure to US companies instead of their European peers.

The EU is not alone in seeking to divert consumers’ investments to local companies.

The UK is hoping to boost investment in local stocks by introducing an individual savings account dubbed the “British Isa”, which would allow investors to put £5,000 a year in UK equities tax free.

The proposals come amid declining demand for domestic equity investments in the UK and Europe, research from ISS Market Intelligence has shown.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.