Investment managers see a change in US monetary policy as the top risk to equities, and also have concerns about US corporate profits and a preference for non-US equities, according to a quarterly survey by Northern Trust Asset Management.
The survey of approximately 100 money managers also provided some perspective on business activity around unconstrained investment strategies and the growth of Outsourced Chief Investment Officer (OCIO) mandates by institutional investors.
In the first quarter, managers placed monetary policy first on a list of risks to equities over the next six months, replacing geopolitical risk, which had topped the list for the past year. The change came as the Federal Reserve indicated it is closer to raising the base US interest rate and removing some of the monetary stimulus that has supported financial markets over the last several years.
Investment manager views on US corporate profits also shifted, with 35 per cent expecting a decrease in earnings, up from 5 per cent the previous quarter. Managers saw the most opportunity in non-US equity markets: 88 per cent said European markets are fairly or undervalued, compared to 82 per cent who placed emerging market equities in those valuation categories and just 62 per cent who viewed US equities as appropriately valued or undervalued.
“More managers expect US economic growth to be stable rather than accelerating in this quarter’s survey, while US equity valuations are a little less attractive and volatility is expected to rise,” says Christopher Vella, Chief Investment Officer for Multi-Manager Solutions at Northern Trust. “For the first time in several quarters, managers are more bullish on non-US developed market equities and US small cap stocks than they are on US large cap equities.”
As the US dollar appreciates against the yen and euro, 72 per cent of managers believe that the economies of both Japan and the Eurozone will benefit. Nearly three quarters (74 percent) of managers see little or modest probability of a Eurozone crisis resulting from Greece’s debt negotiations and rising anti-euro sentiment in some countries.
Meanwhile, expectations for the US economy moderated from previous quarters, with more managers saying GDP growth, housing prices and job growth will remain stable rather than accelerate over the next three or six months. Expectations for market volatility were also lower: 69 per cent of managers said volatility, as measured by the Chicago Board of Options Exchange Volatility Index (VIX), will increase over the next six months, down from a historic high of nearly 80 per cent of managers with that view in the fourth quarter.
“More managers reported this quarter that they have increased the risk aversion in their portfolios and increased their cash level to above historic norms,” says Mark Meisel, Senior Investment Product Manager for Multi-Manager Solutions at Northern Trust. “While most maintain steady levels of cash or risk aversion, it seems that valuations and reduced corporate profit expectations in the US may be leading some managers to take risk off the table.”
For more than half of the managers (54 percent) surveyed, outsourced chief investment officer (OCIO) mandate are a growing or steady part of their business. In an OCIO mandate, a pension, endowment or other large asset owner hires a third-party investment firm to take on fiduciary responsibility for running an investment program. Among the 54 per cent of managers with OCIO mandates, 31 per cent reported it is a small but growing part of their business, 18 per cent said it is a steady part of their business and 5 per cent said it is a significant and growing source of business flows.
Investment managers also reported increased interest from investors in unconstrained strategies, which invest across various asset classes, sectors or market capitalizations, not tied to traditional benchmarks. Thirty-six per cent of managers reported increasing interest from prospects in these mandates.
