Good times beckon for equity fund managers
Fixed income mutual funds attracted $286b of net new money from investors last year
Two years ago the fund management industry talked excitedly of a potential “great rotation” — the idea that big investors would pull money from bonds in favour of equities.
The great rotation theory never took off. Fixed income mutual funds attracted $286 billion (Dh1.05 trillion) of net new money from investors globally last year, far outstripping the $220 billion of flows into equity-focused equivalents.
That trend has been reinforced so far this year, with global bond funds drawing $153 billion of new money in the first four months of 2015, according to figures from Morningstar, the data provider. Equity funds, by contrast, have attracted just $43 billion over the same period. There are signs, however, that investors may be about to change tack on stocks as their search for returns in the low interest rate environment intensifies.
Create,
the
asset
management consultancy, researched the asset allocation preferences of 705 institutional investors, including pension funds, sovereign wealth funds, asset managers and investment consultants with combined assets of $27 trillion, in the first four months of 2015.
The findings bode well for active and passive equity fund managers. A third of the respondents said they expect investors to increase their exposure to equities significantly over the next three years, compared with just 16 per cent who disagreed. Ameen Rajan, chief executive of Create, says: “To be risk averse is the biggest risk [investors] face. Investing in an era of negative real yields is like driving a car backwards. [Quantitative easing] has pushed all investor groups up the risk curve — whether they like it or not.”
Investors believe this shift will be particularly prevalent among defined benefit pension schemes, which are struggling with the punishing combination of rising liabilities, rising deficits and rising negative cash flows. Defined contribution pension plans and retail investors are also expected to take on more risk through higher equity exposure. Rajan says: “Prudence has held that retirees or near-retirees should be overweight in bonds and not take risks with their retirement nest eggs. The prospect of ultra-low yields for the foreseeable future is sidelining this age-old wisdom. In search of yield, investors are now forced to act contrarian.”
More than two-thirds of investors, expect current equity valuations to be sustained, despite the fact that several equity indices have hit all-time highs this year.
Financial crisis
Nearly half (47 per cent) of investors also believe there will be a rotation from bonds into equities, potentially reversing the trend that has taken hold since 2006.
The scarring experience of the financial crisis led US pension schemes to cut their equity exposure from 69 per cent in 2006 to 50 per cent in 2014.
A similar shift has taken place in the UK, where pension funds have reduced equity exposure from 58 per cent to 40 per cent.