Fund managers urge ‘risk-on’, but buyers remain ‘risk-off

Europe’s fund buyers are remaining in generally conservative positions, stances some took months ago, despite fund managers repeatedly point to major asset classes trading at multi-decade cheap valuations.

This is revealing a fundamental division between how fund managers and fund buyers are seeing the markets.

Managers including Fidelity, Sector Investment Managers, Skandia and Schroders all spoke before yesterday’s share market rout, when major European indices fell more than 5%, of the importance of not cutting risk asset exposure, and exploiting not fleeing the opportunities now available.

At the same time, allocators highlight macro clouds such as slowing or stalled economic growth in core Europe, rising developed world debt, and increased chances of recession, as reasons not yet to be ‘risk-on’.

Their allocations are almost wholly defensive.

Bernd Poegel, who helps oversee  €27.8bn in fund-based asset management products as DekaBank’s head of fund research, said: “We refrain right now from buying in the current frenzy. We want to experience a few days with sinking volatility” before any assessment of markets, or repositioning of assets his team manages.

Eric Siegloff, who oversees €20bn as global head of strategy and tactical asset allocation at ING Investment Management, will not move to a more aggressive, risky asset stance without more convincing evidence and “credible announcement and commitment” to structural reform by major policy makers.

“Monetary policy remains generally stimulatory in key developed economies, however a lot of fiscal policy bullets have been spent and there is great pressure to reduce deficits and debt. The developed world will need to undergo significant structural overhaul over the next five years at least.”

Steven O’Hanlon, head of fixed income at London fund and wealth manager ACPI, said it was baffling, “given the state of the world’s problems and global financial system, we just put a plaster over it in 2008 and said ‘you’re fine’. The problems today are monumentally more dangerous than they were then – now we are talking about whole countries.”

Where funds of funds managers still hold risk assets, they also mention at least actively using derivatives at the fund of funds level, to limit losses.

For example, John O’Toole (pictured), who oversees €30bn as head of multi-asset portfolio management at Pioneer Investments, bought volatility when the Vix index was calm at 14 in February. It since soared 47, including a 50% jump one day this month.

Europe’s funds of funds managers generally prefer emerging over developed markets, relative-value over directional bets, and US Treasuries over peripheral European debt.

But some asset managers have questioned the value of some safe harbours including US Treasuries, and Swiss and German sovereigns.

Blue Diamond Asset Management’s Alex Orus said: “A ‘de-risking’ of a portfolio does not always mean less equity and more bonds. The current yield curves in the US, Switzerland, and Germany indicates extremely low or even negative real yields across all maturities. A negative real yield for any investors means a certain loss.”

For more on investor positioning in the current market turmoil, see the next edition of Investment Europe.

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