March 23, 2018 / 11:03 AM / 2 years ago

Wall St Week Ahead-Globalists buck U.S. index fund trend

    By Trevor Hunnicutt
    NEW YORK, March 23 (Reuters) - Volatility in U.S. equity
markets this year is pushing investors not only to invest in
stocks abroad, but also to commit their money to an even more
foreign place: the hands of stockpickers rather than index
    A near decade of gains in U.S. stock prices has left
investors on edge about the prospect that anything could end the
party, including the prospect of interest rate rises under new
Federal Reserve Chairman Jerome Powell or a misstep by one of
the market's darlings.  
    For instance, the 9.2 percent two-day slide of Facebook Inc
       earlier this week, which wiped out $50 billion in its
market capitalization, underscored the risks to market leaders
in the technology sector after the social media company faced
questions from regulators and politicians about how its users'
personal data was mined by a political consultancy hired by
Donald Trump's presidential campaign.             
    Josh Shores, principal at Southeastern Asset Management Inc,
said the time is ripe to look outside the United States as
valuations are more attractive overseas relative to their risks.
    "At the end of an almost 10-year bull up-cycle where the
U.S, and growth and passive have really dominated," he said, "we
feel good about being positioned the other way from here."
    Small wonder. 
    Stockpickers focused on investment abroad have been huge
beneficiaries of new investor cash as many have beaten their
benchmarks. Those funds are on course to post their second
straight year of inflows even as their U.S. counterparts face
the sting of investor flight to lower-cost index funds. 
    Actively managed non-U.S. stock funds have already attracted
$19.4 billion in 2018, far surpassing outflows at the same time
last year, and nearing the $23.5 billion total for all of 2017,
according to Thomson Reuters' Lipper research unit. 
    Their passively managed rivals have taken in $45.6 billion
so far this year, through February.
    In 2017, 50.8 percent of "foreign large blend" funds tracked
by Morningstar Inc beat their index-tracking rivals, while 59.1
percent of diversified emerging market funds succeeded, in both
cases improving their less impressive long-term track record.
    The volatile start to 2018 for U.S. stock prices is giving
investors all the more reason to defang portfolios heavily
weighted towards technology giants. Facebook accounts for about
2.0 percent of an S&P 500 index        fund's return.
    "Tech is not a heavy benchmark constituent in our part of
the world," said Thomas Melendez, manager of the $11 billion MFS
International Diversification Fund          , whose performance
has bested most rivals over the last decade, according to
    More cash to manage would be a boon to investors including
Fabio Paolini, a portfolio manager on the AMG Managers Pictet
International Fund          , which has turned in stronger
performance than its peers and index over the past three years.
Pictet Asset Management SA manages $197 billion.
    Paolini and other investors focused outside the United
States see places where they can put the cash to work with
bargain-priced, all-weather companies that will grow even if the
economy stalls.
    "We see opportunities - a little bit everywhere," said
Paolini. The company took a stake, for instance, in Safran SA
        , the Parisian aircraft engine company that he said
enjoys a near-monopoly position in its market.
    Southeastern, with $18 billion under management, has built
up a stake in London-based Hikma Pharmaceuticals PLC         in
recent months, as other asset managers have ditched stocks in
the region.
    That stock's true value has been clouded by investors'
pessimistic view on both generic drugs and the United Kingdom's
negotiations to exit the European Union, but the drug company
has valuable business units including injectable drugs, said
    More than four in ten fund managers surveyed by Bank of
America Corp are holding less stock in Britain than their
benchmark, an all-time high.
    Many of the active international funds are taking big bets
on small groups of stocks, hoping that they will end up with far
better gains than index funds whose performance is diluted by
hundreds of holdings.
    The Prudential Jennison Global Opportunities Fund          
has fewer than 40 holdings, with top positions like Tencent
Holdings Ltd           taking up nearly 6.0 percent of the
    One of the portfolio managers, Thomas Davis, said he has
high conviction in the Chinese technology giant's prospects. The
company on Wednesday reported quarterly revenue that fell short
of estimates but its profits were up 98 percent compared to the
year prior.             
    "You have Facebook, Opentable, Uber, Airbnb, some basic
financial services all embedded within the Tencent WeChat app,"
said Davis, noting that the company offers many functions in one
    "It's more than Facebook."

 (Reporting by Trevor Hunnicutt; editing by Jennifer Ablan and
Clive McKeef)
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