Global jitters

A report released by Merrill Lynch this week suggests global fund managers are exhibiting a “heightened aversion to risk,” most likely resulting from the precipitous market sell-off in the dying days of February. But do Canadian managers agree?

The study highlights some of the key changes in response to some of the increased volatility evident on the world markets in recent weeks: shorter investment time-horizons, larger cash holdings and a generally lower appetite for risk. Since they share the same stage, you’d think the managers of the global funds sold here would adopt a similar stance.

However, it seems a number of Canadian managers have a different perspective. In its regular conversations with fund managers, Morningstar Canada hasn’t been given any indication from global managers that they are altering their outlook. There has been nothing to suggest that funds are becoming more bearish or are building up cash positions, says David O’Leary, a senior analyst for the fund-rating company.

“The cash levels are rising,” he says after a quick check of the categories, “but it may just be that they haven’t been able to invest the money fast enough, as opposed to a conscious decision.” Coming off a successful RRSP season, it’s understandable that funds could have an excess of cash.

That’s not to dismiss the findings of Merrill Lynch, which found that portfolio managers upped their cash balances to 4.4% from 3.8%, with a net 30% of respondents indicating that they are overweight in cash. Merrill Lynch’s Composite Indicator for Risk Assessment, meanwhile, is at a five-year low. And, interestingly, the survey found that managers have “their shortest investment time horizon in four years, with an average investment time horizon among the panelists of just seven months.”

Considering 199 fund managers took part in the global survey between March 9 and March 15, managing a combined $668 billion US, Merrill Lynch’s findings are worth noting.

It appears Merrill Lynch was a little surprised by just how much portfolio managers were swayed by the recent sell-off. While the re-pricing of risk is no surprise, wrote David Bowers, an independent consultant with Merrill Lynch, in a release, “what is interesting is the extent to which this sell-off reflects a more fundamental reassessment by investors of global macro prospects.”

Don Reed, portfolio manager of the Templeton International Stock Fund, advises not to put too much stock on short-term swings. “We hold a stock for on average five years, and so what’s happening in the short term is not really of major concern to us,” he says. “When a stock goes down in price, the value of those companies doesn’t change, just the price.”

A little volatility, which has been increasing for the past few years, hasn’t caused Reed to change his posture. On the contrary, he’s been buying stocks. Volatility creates buying opportunities, he says.

Rather than wait for the market to find its footing, Reed says, he has been committing the money that has come in over RRSP season to bargain stocks as quickly as it comes in. That was true throughout the month of February — before the market correction — as now.

The only difference this year, he says, is that significant amounts of money poured into the fund in February, whereas in previous years, most of the money invested in RRSPs wouldn’t be committed until March.

The Merrill Lynch study makes another interesting point. Even among those managers who are sheltering cash, as many as 25% of them say they plan to increase their equity exposure over the next three months.

Add to that a new survey by MFC Global Investment Management that found that defined benefit pension plan sponsors intend to make significant shifts to the equity allocations within their portfolios over the next two years — specifically, increasing their international equity exposure.

A third of plans expect to hike their international (excluding U.S.) equity allocation over that period; 15% of plans intend to hike their allocation to global equities, which include both international and U.S. equities.

Taken together, this is hardly a sign of long-term doom and gloom.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/22/07)