Money fails to move with rising beat

Fund managers are at their most bullish for more than three years, but advisers remain cautious, saying stockmarket rallies have been caused by sentiment rather than improving fundamentals.

Merrill Lynch Global Fund Manager survey data for March indicated a sharp upturn in investor sentiment. As Fund Strategy reported last week, the poll showed managers at their most bullish on the prospects for economic growth since December, 2005.

The Merrill Lynch global growth indicator registered a reading of zero, signalling a balance between the numbers of optimistic and pessimistic respondents.

Upbeat sentiment was reflected in greater expectations for corporate profits, with a net negative reading of 29%, the highest figure since mid-2007. Equities were also seen as undervalued by more respondents: 42% said the asset class is relatively cheap, compared with just 24% in the ­February survey.

However, the increasingly optimistic mood is yet to translate into positive action. Equity allocations fell close to an all-time low in March, while bond and cash weightings remain high. The Merrill Lynch Risk & Liquidity Composite Indicator also fell, from 31 to 28, marking an end to a tentative pick-up in risk appetite that began last October.

Adviser Fund Index (AFI) panellists are equally cautious, despite positive news for equities in recent weeks. Adrian Lowcock, senior investment adviser at Best­invest, says stockmarket ­rallies in March were driven by sudden changes in sentiment rather than by improving fundamentals.
The S&P 500 last Monday posted its biggest one-day gain since October 2008, as investors reacted positively to details of the American Treasury’s toxic asset plans.

“We are still wary of any recoveries at the moment,” says Lowcock. “Two weeks ago, market sentiment suggested there was no hope left, and that has flipped quite quickly. There are opportunities but we are drip-feeding money into the markets. Any rise could be short-lived – we need to see spreads come in and fundamentals dealt with before there can be a sustained recovery.”

James Davies, an investment research manager at Chartwell, is also circumspect. “Mon­day’s rally was predominantly around financials,” explains Davies. “It looks like a bear market rally – the long-term direction of the stockmarkets still can’t be predicted with confidence.” Slowing Chinese GDP growth is an area of particular concern, he adds, with rising internal demand as yet unable to fully counterbalance falling exports.

Davies says Chartwell’s clients have increased their cash reserves, although risk appetite is slowly returning. “Investors are starting to realise that cash is not providing anything and gilts are a return-free risk,” he says. Corporate bonds have been the main recipient of client cash, adds Davies – he highlights Richard Woolnough’s M&G Optimal Income fund as an attractive buy. The £300m portfolio appears in all three AFI indices, with a total of 13 selections.

Within equities, Davies says Chartwell’s geographical allocations largely mirror those of the Merrill Lynch survey respondents – the poll found that, on a 12-month view, managers are overweight America and the emerging ­markets, and underweight Japan and the eurozone. Davies favours Jeremy Smith’s £20m Neptune UK Equity portfolio – because of its focus on global themes – Argonaut European Income and M&G Global Basics.

Within equity markets Lowcock prefers America, although he does not expect shares to bottom-out until the second half of 2009. Bestinvest recommendations include M&G American and Martin Currie North American.

The £700m M&G port­folio, which is run by Aled Smith, appears in the Aggressive and Balanced AFI indices, while Tom Walker’s Martin Currie fund features in all three benchmarks. According to Financial Express, the £440m Oeic has struggled against its sector over the past 12 months. However, its three-year numbers remain strong, with a second-quartile return for the period ending March 25.

Continued caution among the panellists is likely to come to the fore ­during the next AFI rebalancing, on May 1.
Equity allocations range from 47% in the Cautious index to 85% in the Aggressive benchmark, while fixed interest weightings are between 7% and 39%.

Last November’s rebalancing brought a marked shift away from domestic exposure, with British equity allocations fal­ling by 5-7%. Bond weightings rose across all three indices.

AFI Aggressive

AFI Cautious

The Adviser Fund Index series – a summary

The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs.