Sovereign Wealth Funds Bet on European Stocks to Outperform US

Sovereign Wealth Funds Shift Focus to Europe

Investment chiefs at top-performing global sovereign wealth funds are increasingly turning to European equities, anticipating that they will outperform their transatlantic counterparts over the next decade. This shift may signal a growing unease among some global asset owners regarding the long-term prospects of the U.S. stock market.

Brad Dunstan and Will Goodwin, co-chief investment officers at the NZ Super Fund, which manages NZ$76 billion (approximately US$44 billion), stated in an interview that European equities are their largest “overweight” position relative to the fund's benchmark investment portfolio. The fund takes tactical positions in markets it believes will deliver superior performance.

“Recently, we've been shorting U.S. equities and going long European equities… That’s purely based on our view of equity valuations,” Dunstan said, adding that the decision to favor different markets was made with a “long-term, 10-year view.”

As of the end of June, under its “strategic tilting” mandate, which expresses the fund’s view on equity prices, it was overweight European stocks by 2% and underweight U.S. stocks by 3.5%. For commercial reasons, the fund managers do not disclose the timing of when the positions were built.

Why Europe?

The core idea behind their investment stance is that European stocks, as measured by the Europe Stoxx 600 index, are currently priced below their “fair value,” while U.S. stocks are priced above that level and will relinquish that premium at some point in the coming decade.

“The U.S. is going to face greater inflationary risks,” Dunstan said, adding that the impact of U.S. tariffs is largely just “noise” for long-term asset owners.

However, he said that the outlook for U.S. interest rates led him and his colleagues to believe that U.S. stocks, which currently trade at a price-to-earnings ratio of around 27.5 times, are overvalued.

Historical Performance Comparison

His comments come as European stock valuations have lagged those in the U.S. in recent months, with Europe trading at a price-to-earnings ratio of around 16 times, as Trump has walked back his most aggressive tariff threats and U.S. corporate earnings have remained resilient.

From a 10-year perspective, the world's largest economy's stocks have far outperformed their European peers, with the S&P 500 index rising over 310% in terms of total return, while the Europe Stoxx 600 index rose 115%.

According to data platform Global SWF, the NZ Super Fund has been the top-performing sovereign wealth fund over the past two decades, with annualized returns exceeding 10%. The fund began investing in 2003 and has an investment team in Auckland of 79 employees.

Unique Investment Strategy

Dunstan said this was because the fund took “quite a lot of risk,” which had been rewarded over the past two decades. He said the fund’s “whole-portfolio” approach enabled fund managers to be “quite flexible in how we focus the fund,” which had allowed it to outperform other funds with similar growth strategies.

The “whole-portfolio” approach assesses risk at the entire portfolio level, contrasting with traditional methods of setting how much to invest in certain assets through strategic asset allocation, which can make it more time-consuming to make adjustments outside those boundaries.

European Private Equity

The NZ Super Fund's preference for Europe extends to the private equity space as well, where Goodwin said there were “good opportunities.” He looks for “younger, hungrier” fund managers where the NZ Super Fund can be a large investor in a private equity fund and build strong relationships with the managers of companies the fund invests in.

He added that given the trend of companies staying private for longer, private equity is a necessary part of the portfolio, but that some private equity funds are currently under pressure as investors are starting to realize that, for the price levels that private equity funds set for their own assets, “the market may not buy it.”

The NZ Super Fund has around 5% of its portfolio invested in private equity. Goodwin said he expects that asset class not to become “a big structural part of our portfolio.”