Fund of funds managers fear new correction

Date: Friday, December 29, 2006
Author: Alan O'Sullivan, Citywire.co.uk

Fund of funds managers remain wary of another bumpy year for global equities.

The latest Citywire fund of funds survey shows managers are generally divided on whether North America is the place to be, even though all managers are united in their belief that the dollar will continue to fall next year.

The majority of managers are also unsure of whether they can outperform next year and a large majority believe a severe correction may be on the way.

Richard Philbin from F&C Investments increased his exposure to North America over the past month by investing in the Parvest US Value fund . Similarly, the multi-manager duo at Credit Suisse, Rob Burnett and Gary Potter, increased their exposure to North America and North American Smaller Companies by investing in the Findlay Park US Smaller Companies and the SocGen American Growth funds.

On the other hand, Patrick Armstrong at Insight Investments has reduced his exposure to North America and increased his holdings in global emerging markets by investing in the Fidelity India fund, HSBC Brazil fund and upped his weighting to Aberdeen Asset Management’s Asian specialist Hugh Young.

All of the managers surveyed were neutral on all of the major markets, apart from the Far East and Japan regions, in which almost 43% of managers had a more than neutral weighting.

However, two managers were bearish on these regions: Bambos Hambi from Gartmore and Philbin reduced their exposure to Japan, while Philbin also reduced his holdings in the Far East excluding Japan region by upping his cash weighting.

Japan was also one of two areas, along with Europe, where almost 43% of managers invested in growth stocks, while the remaining 57% went for a mixture of growth and value in each of the other major markets.

Managers were reasonably confident that they could deliver positive returns over the next 12 months, with two thirds of the managers expressing reasonable confidence and the remaining third slightly more confident.

However, all of the managers surveyed believe the dollar has further to fall over the next year.

Patrick Armstrong from Insight Investment says: ‘We expect the slowdown in the US housing market will help ease excess US consumption. The economy definitely seems to be headed for a significant slowdown.

‘Classic late style indicators such as bottoming unemployment numbers, negative savings rates and multi-year highs of industrial capacity utilisation seem to confirm this.’

Another negative factor for performance next year may be that a majority of the fund of funds managers surveyed agree with the view expressed by Anthony Bolton in November – that there could be a more severe correction in markets this year than the one experienced in May last year.

Philbin was one of the 43% of managers who believes another correction is on the way and is using the cashflows within his funds to actively de-risk the portfolios.

Yet T Bailey’s Jason Britton was one of the 28.5% of managers that disagreed. He said: ‘By [Bolton’s] standards, it has not been a great year for the ‘Silent Assassin’… We remain cautiously optimistic.’