Active fund redemptions cause collapse in US ‘growth company’ premium

GAM’s Jeffrey Coons says that a rotation to non-discriminatory ETFs is creating sharp inefficiencies in US shares.

The popularity of benchmark products is not universally welcomed. US equity markets are “becoming as inefficient as they have ever been” as investors pull unprecedented amounts from active fund managers, who discriminate between companies, and rotate from equities either completely or into passive products that do not differentiate between firms, according to the manager of GAM’s Star US All Cap Equity fund.

Jeffrey Coons (pictured), who runs GAM’s fund from US firm Manning & Napier Advisors, says that outflows from active funds are exceeding $100bn some quarters and continuing to do so, even as shares rallied early this year and this is “unhooking the mechanism the market has to establish fair value at a company level”.

As a result, high-growth companies are as attractively valued as they have been since the mid-1990s, Coons says.

He adds: “High growth is being priced at much the same level as low growth, even though over the longer term it is earnings and sales growth that drive returns. We are down to a PE differential of less than two points between top growth and low growth, and that is unsustainable.”

Coons observes a correlation of 0.68 between net outflows from active US equities funds and the collapse in ‘growth premium’.

As a result of investors rotating, ETFs and index funds now deploy roughly every third dollar in America’s listed companies. But, because they do so without differentiating, US companies are not being priced fairly any more, Coons says.
But he adds that fundamental investors “lack the mechanisms”, and arguably the firepower, to help ­companies reach fair value in the face of such ETF volumes.


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