Fund managers take increasingly polarised view on equities
Fund managers have adopted a more bullish stance on equities, but as a group have become more polarised. At the same time, volatility continues to drive retail investors out of equity funds.
In terms of allocation strategy for the third quarter, 63% of global managers are overweight equities, compared with 44% in the second quarter. What's more striking, perhaps, is that 25% are now underweight, compared with 11% previously; 13% are neutral, against 44% previously.
It means global managers are taking a stronger view one way or the other and there are fewer occupying the middle ground, HSBC’s most recent quarterly fund manager survey finds.
“There is a diverse view and some managers are worrying about a double dip, although I don’t think there is consensus on this yet,” says Bruno Lee, regional head of wealth management Asia-Pacific at HSBC. “But they agree there will be a slowdown in the global GDP growth rate.”
As for fixed income, managers have grown increasingly positive on Asian (83%) and high-yield/emerging market bonds (71%), and more bearish on European bonds (83%). A higher 57% take a neutral cash position, with more underweight and fewer overweight on cash than before.
Overall funds under management (FUM) increased by $51 billion quarter-on-quarter in Q2, led by a $62 billion rise into bond funds. This was led by 14.5% FUM growth to Asian bonds, followed by global bonds (10.8%) and high-yield/EM bonds (8.9%).
Retail reticence
Lee points to three reasons for managers’ renewed positivity on equities: expectations of continued US and European liquidity amid the Fed’s prolonged accommodative stance; reasonable corporate earnings results; and valuations.
He notes that the average price-to-earnings ratio for the MSCI World Index is currently below 11 times, while for the US market it is 11.3 times and a little over 8 times for the Euro Stoxx50 Index.
“This kind of earnings multiple is attractive by historical standards,” says Lee. “By and large, fund managers feel that current uncertainty and negativity has been factored into stock prices.”
By equity asset class, growth net fund flow saw the strongest quarter-on-quarter increase for North American equities (1.7%), followed by European (including UK) equities at 1.2%.
Interestingly, the highest FUM outflow in Q2 was suffered by Greater China equities (-7.6%), with the asset class delivering the worst market performance of the quarter (-1.9%).
Yet in follow-up interviews post Q2, fund managers indicated to HSBC that their overweight stance on Greater China equities had more than doubled (57%) on the previous quarter.
“When the market goes down, arguably that makes the asset class more attractive,” notes Lee. “But seeing the volatility carry forward from August to September, and with stock market turnover low, it is clear retail investors remain on the sidelines.”
He suggests that unless Federal Reserve chairman Ben Bernanke is able to offer clear direction in the extended open market committee meeting this September 20/21, retail customer sentiment will likely remain weak.
“Despite fund managers wanting more money to invest in the market, retail investors are just not opening up their wallets,” Lee says.
He suggests that despite the relative attractiveness of the asset class, retail investors have become notably more short-term and sensitive to negative news. He also points to their inertia, given that they have been earning steady dividends from bond funds and fixed income investments.
“What they are probably not aware of, however, is that with 10-year US Treasuries only offering slightly over 2%, there is an increasing interest-rate risk. This may lead to some potential capital losses if there is any significant rise in bond yield.”
It’s clear that fund managers have been striving to pull retail investors back into equity markets, with some success, by launching hybrid products such as dividend yield or income-orientated funds.
“These hybrid products are helping to get the attention of some investors who like the idea of a stable income stream while at the same time investing in more stable equity sub-asset classes,” notes Lee.
Looking ahead, he says fund managers are anticipating further supportive monetary policy from the Fed. “The fact that Bernanke has said another day will be needed in the forthcoming policy meeting this month has increased expectations that something is cooking,” notes Lee. “The expectation is building up.”
HSBC's quarterly fund manager survey analysed feedback from 12 of the world's leading fund management houses in July and August, with aggregated AUM of $4.4 trillion.