Thankless year ahead for money managers

Equities will outperform bonds in the year to come, but money managers have a bit of a thankless task ahead. Institutional money managers surveyed for Mercer Investment Consulting’s annual “Fearless Forecast” say they expect to see volatile Canadian equity markets and only moderate returns from both asset classes in 2005.

Of the 48 investment managers surveyed, more than half say they expect markets to be more volatile this year, possibly a result of the relatively low volatility exhibited by markets in 2004.

Overall, they expect equities to outperform bonds. Predictions on bond and cash market returns range between 2% and 4%, and equity market returns between 7% and 8%.

“They’re predicting a solid year for 2005, but certainly not a blowout year,” says Jaqui Parchment, principal at Mercer Investment Consulting in Toronto. “The loonie’s strength is the number one issue impacting Canadian capital markets in the year to come.”

Following that, she says managers cite performance and stability of the Canadian economy, together with international issues, such as stability in world currency markets, and the performance of the Chinese economy, as leading factors influencing capital markets in 2005. Interestingly enough, international issues ranked ahead of U.S. and domestic interest rates and inflation in the list of money manager concerns. Median predictions put the Canadian dollar at 85 cents US, Canadian interest rates at 3.25% and U.S. interest rates at 3% by the end of the year. Managers expect Canadian and world GDP growth around 3%, and put Canadian inflation around 2% for 2005.

Colouring the investment picture, Canadian companies are expected to lead the trend in disclosing executive compensation, specifically executive pension values. “Shareholders want more disclosure,” says Paul Purcell, principal and worldwide partner at Mercer Human Resources Consulting. He says several corporations, including Manulife and the major banks, received shareholder proposals in 2004 to disclose the total value of pensions awarded to senior officers and the corresponding annual costs related to the plans. “I like to call it the big number and the little number,” he says. The motion carried at Manulife, “albeit by the thinnest of margins.” The proposal was carried by a vote of 50.05%. At National Bank a similar proposal received nearly 40% support.

More companies are expected to start disclosing pension values in the coming year. Those that do will likely generate a lot of attention from the move, and this will put pressure on others to follow suit in 2006. The Ontario Securities Commission is expected to come out with guidance on the issue later this month. Purcell says the U.S. will also play a role, but the Securities and Exchange Commission has so far remained silent on pension disclosure. “I don’t know if companies are going to voluntarily disclose in the U.S.,” he says. “The issue exists, there’s pressure on executive compensation disclosure in both countries, but the SEC has been quiet. It’s possible that Canadian companies are going to be at the front of the curve on this one.”

When talking about sectors, managers say energy and materials will outperform in the coming year while utilities and telecommunications are expected to stumble. Although the predictions are very similar to those made for 2004, opinions vary widely on the different sectors. Those who like energy and materials say strong demand for resources, particularly from China, will continue. They also expect the sectors to benefit from mergers and acquisitions in the coming year. Those who don’t like the sectors say they’re already overvalued. “There seems to be a real divergence,” says Parchment. Top large-cap stock picks for the year include Nortel Networks (managers say the bad news associated with the company has already been priced into the stock), Manulife, BCE and Royal Bank.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com