Equities in neutral

Keeping watch for a belated stock market recovery, continental European managers are guiding clients to guaranteed products before equities, writes Simone Leontis. More than two years into the current bear market, it is not getting any easier for portfolio managers to predict stock market movements. This time last year, fund managers and industry commentators were predicting that equity markets would be enjoying a recovery by the end of summer 2002. As with so many predictions during this bear market, this has not come true. Since the start of 2002 to August 9, the S&P 500 has delivered a return of –20.1 per cent while the FTSE All-Share has returned –16.3 per cent . It is now being predicted that a steady stockmarket recovery will begin in the fourth quarter of this year. Portfolio managers in continental Europe, however, have been scaling back their exposure to equities during the year in favour of fixed interest and alternative investments after a stock market recovery failed to materialise earlier this year. Dutch bank ABN Amro, for example, had a neutral weighting on equities earlier this year but was increasing the amount of clients’ money invested in emerging markets and high yield bonds. “As the year has moved on and the economic information has worsened, the ABN Amro Investment Policy Committee has reduced clients’ exposure to equities,” says Gerben Jorritsma, head of discretionary portfolio management at ABN Amro. “But we have retained the overweight position in emerging markets as there is still exceptional value in this area, while the portfolio allocation to fixed interest, alternative investments and cash has been increased. “The geographical allocation in equities has also changed during the year. The allocation earlier in the year was more tilted towards a slightly overweight posture to the US, which was expected to lead the economic recovery during 2002. “We were neutral to overweight in Europe and underweight in Japan. This has now changed to a neutral weighting in the US and Europe and reduced underweight exposure to Japan.” ABN Amro has been increasing its clients’ exposure to alternative investments through its own fund of hedge funds vehicle – the ABN Amro Multi Strategy Fund. But Mr Jorritsma stresses that the maximum exposure to hedge funds is 10 per cent of a client’s portfolio. The Dutch bank said that the continuing falls in stockmarkets this year has led to greater interest in structured products among its high net worth investors. “We include capital guaranteed products within discretionary portfolios as more and more investors are looking to gain exposure to the capital security that these products ensure,” says Mr Jorritsma. Even though as an asset class property has performed strongly over the past two years, ABN Amro does not include it within clients’ portfolios. “Generally, high net worth individuals have exposure to the property market outside their portfolio and this is why we do not actively use this asset class,” says Mr Jorritsma. He added: “We believe clients’ attitudes towards risk have changed considerably. Investors have returned to viewing equities in a more realistic manner. “Investors are more and more aware that they need to diversify their portfolios if they are going to receive consistently good performance.” One of the leading fund of funds providers in Germany, DWS, has also reduced the equity exposure of its portfolios – from close to 100 per cent two years ago to 50 per cent. DWS, a subsidiary of Deutsche Bank with E4.5bn in assets under management in fund of funds and E6bn in total, has increased its weighting in money market funds to 30 per cent of portfolios. This is reflected in the significant growth of assets in these funds over the past few months. According to fund research company Fitzrovia International, the five fastest growing cross-border funds in Europe in June were money market funds. Pioneer Euro Short-Term topped the inflows league by attracting e1.3bn in June, followed by Merrill Lynch Liquidity e1.6bn, Citibank Liquidity e770m and JP Morgan Fleming Liquidity e575m. While DWS stresses that the asset allocation within individual portfolios depends on the age of the investor and the level of risk he is prepared to take, there has been a general shift to bonds as equity markets have fallen during the past two years. About 20 per cent of clients’ portfolios at DWS are currently invested in fixed interest, although it does not provide any allocations to property or alternative investments. According to DWS research, there is a preference among German investors at the moment for buying European and Japanese funds rather than US equities after the 20 per cent fall in the S&P 500 index since the start of the year. Despite bullishness at DWS about prospects in European and Japanese stockmarkets, the German company says sector funds play a major part in its portfolios. DWS has been promoting the pharmaceutical sector, for example, as it believes it has been oversold in recent months, suffering a decline of 60 per cent over the past year. The company line holds that the media is a “dangerous” area for investors as it could be hiding further accounting problems although financial companies are a good play on a stockmarket recovery as they have been badly hit by the fall in the value of equities this year. Portfolio managers and their clients appear to have lost patience in waiting for a stockmarket recovery. They are turning away from equities and back towards money market funds, bonds and structured products to provide downside protection and some upside growth. There also appears to be a growing acceptance among banks and high net worth investors of the fund of hedge funds concept of trying to provide flat returns in falling markets to preserve capital and single digit returns every month in rising stockmarkets. Perhaps surprisingly, there has been little exposure towards property within the ABN Amro and DWS portfolios. If major stockmarkets enjoy a rally in the last three months of the year, as is being predicted in some quarters, expect high net worth investors’ portfolios to make a significant switch back into equities.

Germans follow multi-fund route while Italy remains under wraps M&G International, the asset management subsidiary of UK life insurer Prudential, only started marketing its funds in Continental Europe in February but it has witnessed the effects of falling stockmarkets this year on portfolio allocations. It plans to launch a range of bond funds before the end of 2002 that will include a pan-European investment grade corporate bond fund as investors, particularly in Italy, have turned away from poor performing equities. M&G International launched a UK open-ended fund in February with a range of 15 sub-funds to be marketed across Continental Europe. It started selling the product in Germany and Austria in February through banks, asset managers, financial advisers and fund of funds. This was followed by entry into Luxembourg in March and Italy in September. William Nott, chief executive of M&G International, says it has raised little money for its US equity fund as European investors have shunned the North American equity markets. The most popular fund so far has been its Global Basics fund managed by Graham French, which invests in primary industries like coal. But Nott expects M&G international, which has signed terms of business with 26 intermediaries in Europe and held discussions with a further 35, to see significant inflows into European equity and bond funds in the future, particularly through fund of funds in Germany and wrap accounts in Italy.