Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Investment chiefs at the world’s best performing sovereign wealth fund are betting that European stocks will outshine their transatlantic rivals over the coming decade, in a sign that some global asset owners are losing confidence in the long-term outlook for US equities.
Brad Dunstan and Will Goodwin, co-chief investment officers at New Zealand’s NZ$76bn ($44bn) Super Fund, told the Financial Times in an interview that the European stock market was the fund’s largest “overweight” position versus its reference portfolio, as it takes tactical positions on markets it thinks will perform best.
“Most recently, we have been short the US and long European equities . . . and that’s purely a view on equity valuations,” said Dunstan, adding that decisions to favour different markets were taken “on a 10-year view”.
At the end of June, the fund was overweight European equities by 2 per cent and underweight US stocks by 3.5 per cent in its “strategic tilting” mandate, where it expresses equity price views. For commercial reasons, the managers do not disclose the timing of positions taken.
Their investment position centres on a view that European equities — measured by the Stoxx Europe 600 index — are currently priced below their “fair value”, while US stocks are priced above that level and at some point in the next decade will give up that premium.
“There’s going to be more inflation risk in the US,” said Dunstan, adding that the impact of President Donald Trump’s tariffs was largely “noise” for long-term asset owners. However, he said, the outlook for US interest rates made him and his colleagues believe that US stocks — which currently trade on a price-to-earnings ratio of 27.5 times — were overvalued.
His comments come as European stocks — trading on a PE ratio of about 16 times — have lost ground against their US rivals in recent months, as Trump has dialled back his most radical tariff threats and earnings in corporate America have remained resilient.
On a 10-year view, the performance of equities in the world’s largest economy has far outstripped that of their European peers, with the S&P 500 index up more than 310 per cent on a total return basis, compared with 115 per cent for the Stoxx Europe 600.
According to data platform Global SWF, NZ Super Fund — which began investing in 2003 and employs 79 people in its investment team in Auckland — has been the best performing sovereign wealth fund over the past 10 and 20 years, with annualised returns of more than 10 per cent.
Dunstan said this was because the fund takes “a lot of risk”, which has been rewarded over the past two decades. He said the fund’s “total portfolio” approach allowed managers to be “pretty agile in terms of how we focus the fund”, which had enabled it to outperform other funds with a similar growth strategy.
The total portfolio approach assesses risk across the whole portfolio, in contrast with the traditional method of setting a framework for how much you will invest in certain assets, through a strategic asset allocation, which can make delivering changes outside those boundaries more time-consuming.
NZ Super Fund’s preference for Europe also extends to private equity, where Goodwin said there was a “good opportunity”. He looks for “younger, hungrier managers” where NZ Super can be a large investor in a PE fund and forge strong relationships with the managers of the companies the fund invests in.
He added that while PE was a necessary component of the portfolio, given the trend for companies to stay unlisted for longer, some PE funds were currently under pressure as investors started to realise “the markets aren’t necessarily there” for the price levels PE funds are putting on their own assets.
NZ Super Fund has about 5 per cent of its portfolio invested in private equity. Goodwin said he did not expect the asset class to become a “large structural part of our portfolio”.
