Sometime around spring 2010, I was sitting in a coffee shop in New York passing time with one of the best equity fund managers of his generation. We were both over from London visiting American companies and he’d had a revelation. Having built his career investing in European – predominantly UK – stocks, he decided he needed to pivot to the US if he was to replicate the strong performance he’d shown so far. He pulled out a napkin and scribbled down a model portfolio: JPMorgan, Nike, Coca Cola, Colgate-Palmolive, IBM.
“Mega-cap growth stocks,” he said. “That’s the investment theme for the next ten years. The winners will be companies with strong balance sheets that benefit from global demand trends.”
Back in London, he put the portfolio on, later swapping out IBM for Amazon and Google. Two years later he changed the name of his fund to better reflect its new emphasis.
At the time, the US made up around 40% of global stock market capitalization. Its economy had just come out of recession and although a recovery was underway, it wasn’t yet showing signs of exceptionalism. That was about to change. Over the next 15 years, the US market went on to grab over 60% of global stock market capitalization. A $10,000 investment in US stocks made in 2010 is worth $73,000 today; the same in Europe is worth only $25,000. And rather than fading, the gap has only widened. Last year, Europe underperformed the US by the greatest amount since 1975 in US dollar terms.
I don’t often post a chart so early, but this is a good one:
There are several related explanations for the divergence. Europe doesn’t have an equivalent of Amazon or Google or any of the other “Magnificent-7” which now make up over a third of the S&P 500 index. More broadly, the global demand for US companies’ products has led them to outgrow their domestic economy. Equity market capitalization now stands at 194% of GDP in the US, having risen steadily over the past decade and a half, while remaining broadly flat elsewhere at around 60%. US company earnings have simply outpaced those of the rest of the world.
For European asset managers, this has been a frustrating period. All the more so because the growth of indexation – a big feature of the industry in the US – hasn’t taken hold in Europe to the same extent. While passively-managed funds now control more assets in the US than their actively-managed competitors, in Europe the market share of passive funds is still only 30%. Cumulatively, European fund managers have taken in more active money than passive money since 2007 – to the envy of peers in America, where around $8 trillion has been reallocated.
Yet weak markets have meant they haven’t been able to capture any benefit. Assets managed out of Europe make up 21% of global assets under management, down from 29% in 2010, according to Boston Consulting Group. Firms have experienced three years of fairly consistent outflows through to the end of 2024.
Recently, though, enthusiasm for Europe has been rekindled. In the first few weeks of the year, the STOXX 50 index of European blue chips has enjoyed a bounce, up 7% so far. Bank of America’s much followed survey of global fund managers reveals a swing in sentiment back towards the region. In January, respondents’ European weightings rose by the most in any month since 2015, and by the second most ever.
Meanwhile, European asset managers have begun a process of consolidation. This week, Italian firm Generali Investments agreed to tie up with Paris-based Natixis Investment Managers to create the second largest asset management firm in Europe, with €1.9 trillion of assets. It follows an announced deal between BNP Paribas and AXA Investment Managers (combined assets under management of €1.5 trillion) as well as one between Banco BPM of Italy and asset manager Anima (€220 billion).
With 61% of its combined assets under management in Europe, the Generali-Natixis combination will be hoping these seeds of enthusiasm flower into something larger. To explore the bull case for Europe and what it means for its asset management industry, read on…
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