US equity large cap funds preferred but small caps edge ahead

Strong gains in US equity markets over the past year have encouraged investors to target the asset class in 2018, but while most prefer large cap funds it’s the small caps that have generated the better returns.

Bearish Ruffer benefits from strong dollar

European-domiciled US equity small cap funds returned 5.93% in the three years to the end of February 2018, marginally better than their large cap counterparts which generated a return of 5.8% over the same period, according to Morningstar data.

However, Last Word Research’s unique survey of fund selector preference found 40% of pan-European fund selectors looking at investing in US equities this year preferred large cap funds. This compared to 33% of fund selectors who preferred US equity small cap funds.

Almost half (46%) of the selectors said they favoured value funds over growth (31%) when deciding on US equity funds. Another 23% had no preference.

When looking at small cap and large cap funds that were either growth or value funds, the combination that performed the best over the three years to 28 February 2018 were large cap growth (75+ growth) at 10.23%.

Source: Morningstar

This graph illustrates the amount an investor would earn if they invested €1 over the three years to 28 February 2018.

While French and Italian fund selectors preferred large cap funds the most (both at 58%) over the 11 other European countries surveyed, they both favoured value funds.

In fact, none of the surveyed countries, on average, preferred value funds over growth funds. The closest were the Portuguese and Luxembourger selectors who had equal weightings for the two styles at 35% and 33% respectively.

Every quarter Last Word conducts in-depth interviews with a broad cross section of fund selectors from across Europe.

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