Vanguard defends dominance of US equities in EU-domiciled funds

Financial Times

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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

The full article is available here. This article was published at FT Markets.