Tactical fund managers bullish on equities, analyst says

(July 3, 2003) Tactical asset allocation fund managers are embracing the contrarian approach, diving headfirst back into equities, while investors do the opposite, according to a recently released report from research firm FundMonitor.com.

Analyst Anthony Corona says that after a prolonged period of decline, many tactical asset allocation managers see equities as attractively valued, while bonds are relatively expensive.

Corona notes that John Arnold and Rory Flynn of Dublin-based AGF International Advisors have recently increased the equity portion in the AGF World Balanced Fund to 93%. The managers have had zero allocation to bonds since January 2002, he adds. “They believe that bonds are risky right now because the investment community has assumed that interest rates will stay flat.”

On the equity side, Arnold and Flynn are looking to European stocks, which they say haven’t been this cheap in 30 years. The AGF World Balanced Fund gained 15% in April and 4% in May.

Other global asset allocation funds are also heavily invested in stocks. Fidelity’s Global Asset Allocation fund has a 72% exposure to equities, while Dynamic’s Focus and Global fund is 99% invested in stocks.

Canadian tactical asset allocation funds aren’t quite as stock-aggressive as their global counterparts. AGF’s Canadian Asset Allocation Fund has a 68% stock exposure and Fidelity’s Canadian Asset Allocation Fund is 44% stocks.

“While not every tactical manager has been as bold as Arnold and Flynn, we definitely see a trend to hold more equity exposure,” Corona says.

Corona concedes that stocks have had a “terrible” three-year run and there are probably still some bumps to come, but “there is more upside at this point than downside.”

“Just as investors made the mistake of being too optimistic and going with the crowd at the top of the last bull market, they may be poised to miss out on the next one by being too risk averse.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca