Performance of European funds significantly lags US funds after T+1

Stay up to date with free updates

Simply sign up to Exchange Traded Funds myFT Digest — delivered straight to your inbox.

Lower returns for European funds investing in US equities compared to US-domiciled funds with similar portfolios is accelerating demand among asset managers for the EU to reduce fund settlement times.

Ignites Europe’s analysis of Morningstar data suggests the change could have a negative effect on European investors, confirming warnings from asset managers about differences in settlement times between Europe and the US.

Average total returns for European-based funds investing in US equities are lower than for US vehicles in the same asset class as settlement cycles have been reduced in the US from two days after the trade date (T+2) on a day or T+ 1.

This finding is also borne out when comparing the smaller universe of passive funds tracking the S&P 500, where EU-domiciled funds have averaged lower returns than US products since the reduction in settlement time on 28 May.

This article was previously published by Ignites Europe, a title owned by FT Group.

Total returns for EU-domiciled S&P 500 tracker funds and ETFs between the start date of T+1 and the end of July were 14 basis points lower than returns for US-domiciled products at 4.14% and 4.28% respectively.

Using weekly return data up to August 3, there is a 20 bps difference between the two groups of funds.

In contrast, over the past one and three years, US funds tracking the S&P 500 have slightly underperformed their European equivalents on average.

Although not conclusive, the data suggest that the change to T+1 is having a negative impact on European funds and their clients, as experts had feared.

One person who works for a large asset manager, speaking on condition of anonymity, said it was “more expensive to operate and trade in Europe” since the US switched to T+1.

The person said this affects exchange-traded funds and other products, particularly at firms with a smaller global presence that cannot easily navigate processes in non-European jurisdictions.

Jim McCaughan, US practice leader at Indefi, an asset management consultancy, said “there will be a measurable performance hit” due to the misalignment of US and EU settlements, depending on the strategy and accounting method implemented by the fund .

McCaughan said the misalignment between the buying and selling cycles for U.S. and European stocks could require a fund to borrow money to cover funding gaps or get a broker to settle a later cycle, which would incur a fee.

EU policymakers are currently considering whether the bloc should follow the US in reducing settlement cycles from T+2 to T+1.

The misalignment between EU and US settlement cycles has been blamed for increasing trading costs for European fund managers, which ultimately dampens returns for investors in the bloc.

The European Securities and Markets Authority is expected to publish its recommendations on whether the EU should switch to T+1 in the coming months ahead of a potential switch in 2027.

Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association, told an Esma hearing last month on a potential EU move to T+1 that “the current misalignment produces a substantial cost factor for the European buy side that is hurting the performance of our funds”.

Ingham told the hearing that this underperformance would “ultimately be borne by end investors”.

Adrian Whelan, global head of market intelligence at Brown Brothers Harriman, added that the increase in trading costs for EU funds following the US switch to T+1 is “one of the reasons why European T+1 is so critical – it would eliminate this funding gap. instantly”.

Whelan said that while T+1 could not be said to have “definitely” reduced the performance of EU funds, “there are two trading cost dynamics that increase the overall trading costs for non-US managers attributable to T+1.”

He said a tightening of trade confirmation deadlines to 9pm EST on the trade date means “if a trader misses that deadline, the trade (goes) into a later batch for processing.” , which “cost more to settle and (may) increase as trade volume increases.”

Whelan added that “unusual trading patterns” emerged on Thursdays, when trading in US securities becomes more expensive because trades must be hedged for a three-day period over the weekend after settlement on Friday.

This creates higher margin requirements for brokers, who then charge higher margins to meet these obligations, further reducing liquidity in the market.

“This funding anomaly occurs particularly on European funds where investor subscription and redemption cycles are generally still T+2,” Whelan said.

Additional reporting by Ed Moisson

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.