US growth equities at best value since 1990s, says GAM

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 fail entirely to differentiate between firms, says the manager of GAM’s Star US All Cap Equity fund.

Jeffrey Coons, who runs GAM’s fund from US firm Manning & Napier Advisors, says outflows from active funds exceeding $100bn some quarters and continuing even as shares rallied early this year 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, he said.

“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 Coons said fundamental investors “lack the mechanisms”, and arguably the firepower, to help companies reach fair value in the face of such ETF volumes.

For fundamental investors to be able to do this again would require “sustained inflows to US mutual funds [and] sustained outflows from bond funds.

“When bond investors realise they cannot get 7% to 8% return with bond yields at less than 2%, you would get bond outflows moving back into equities, and equities managers could think about what they want to own rather than what they have to sell.

“Bonds are no longer a place to hide and hope for adequate returns to offset the risk. You need to focus on companies that will grow.”



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