Shell-shocked investors eye funds warily

Date: Thursday, March 19, 2009
Author: Philip Blenkinsop, Reuters.com

Hammered by the dot-com crash and the current financial meltdown, investors will take some time before being enticed en masse back into many funds, speakers at the Reuters Funds Summit said this week.

Equity funds in particular could prove a tough sell.

Indeed, Ken Kinsey-Quick, head of multi-manager at hedge firm Thames River Capital, declared that equities were dead as a long-term investment.

"Equities will not reach their 2007 high for another 10 or 20 years," he predicted.

Amin Rajan, head of research institute Create, argued that speculative investors could spur corrections in financial or technology stocks given their current low prices, but that the mass of investors would stay on the sidelines for some time.

"Markets will recover but not get into a raging bull market over the next three years ... that depends on investor sentiment," he said.

The bulk of investors, with some $45 trillion in assets, would be much more cautious in their investment strategies, increasingly looking for downside protection.

The dot-com crash that kicked off in 2000 gave the public a lesson in investment risk, but the current crisis taught them systemic risk -- the risk of an entire market collapse.

"People thought that crises were manageable or containable ... now they've seen everything go down the tubes," Rajan said.

Several speakers at the Reuters Funds Summit in Luxembourg said that the financial and fund industry had displayed arrogance, and urgently needed to regain the trust of end-investors.

Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA), said that his industry needed to point out that funds were a very safe investment in the wake of the crisis.

"Unfortunately the whole Madoff affair then emerged. It never rains, it pours," he said. "The lesson that everyone got is if you can't explain it don't sell it. If you don't understand it, don't buy it."

Europe's fund industry shrank by 22 percent last year to 6.1 trillion euros ($7.96 trillion), mainly because of falling asset prices, but also because investors pulled out record amounts.

De Proft said outflows had slowed since October and there were net inflows in January. February, he said, should be "OK."

Noel Fessey, managing director of Schroder Investor Management in Luxembourg, said the funds industry, while not responsible for the financial crisis, still had room for improvement.

"The area it needs to improve most is in the clarity of the language. We should use less jargon," he said. "I could certainly see more appetite for more transparent, simpler products.

The next six months could prove a great point to invest given low prices, he said, but added that he was cautious.

"Slow and steady would be fine. We don't want to dash back to rapid growth if that leads to a relapse," Fessey said.

($1=.7668 Euro)