More international/global money managers are lifting cash positions or seeking refuge in different asset classes in the struggle to find attractive stock markets.
Many, especially in the United Kingdom, fear a slide in today's lofty markets, triggered by higher U.S. interest rates. As they see it, a rise in U.S. rates would jolt Wall Street, which then would hurt other markets.
That fear, coupled with the recent Southeast Asian market debacles, has raised warning flags for some managers. To them, good investments have become harder to find.
Data from the London office of Merrill Lynch, Pierce, Fenner & Smith Ltd. underscore the difficulty money managers have had finding good investments in the past several months.
In early June, the number of U.K. managers that preferred to invest cash exceeded by 24 percentage points those that wanted to raise cash holdings, a Merrill survey showed. But by September, managers that wanted to raise cash outnumbered those that preferred to invest the cash by 6 percentage points, Merrill found.
Overall, in globally invested portfolios (excluding property) in early September, managers of U.K. pension funds had an average 6.5% cash weighting, vs. 5.4% in August, Merrill Lynch's data show.
In comparison, U.S. managers of broad international equities portfolios had 3% in cash in early September, the same as a month earlier. But the cash level was still above the 0% weighting of the Morgan Stanley Capital International All Countries World Index.
Bullish in own region only
Among continental European managers, sentiment had become more bullish toward equities in early September. (No average cash weighting for their portfolios was available.) But they were only bullish about markets in their own region, following an August correction in them, according to Merrill Lynch.
In Japan, managers had sizable 12% cash holdings - which had changed little over the summer. And in Asia outside Japan, cash holdings of managers of Asia regional portfolios jumped to 9% in early September vs. a 2% average one month earlier.
Concluded Bijal Shah, Merrill Lynch's global strategist in London: "What has been quite evident, except in continental Europe, is that buying interest in equity markets in particular is receding. Whether managers are actually raising, or else holding cash, they are saying that equity markets are not offering greatvalue at current levels."
Concern on both sides
Clearly, U.K. managers have become more bearish than their counterparts in the United States. But there is concern on both sides of the Atlantic Ocean:
Several prominent U.K.-based firms, rumored to have raised cash this year, would not comment on the matter. However, London's PDFM Ltd., which began raising cash about 18 months ago, said it had 13% cash in globally invested portfolios for its U.K. clients, as of June 30.
About a month ago, Bailard, Biehl & Kaiser, San Mateo, Calif., raised cash to about 10% from 5% in its globally invested portfolios. The money came out of U.S. stocks and bonds. To Arthur Micheletti, chief economic and investment strategist, the U.S. market is "way overvalued." And although valuations on U.S. bonds are "not bad," he expects U.S. interest rates to rise at some point this year.
In August, Seligman Henderson Co., London, raised cash to 5% to 6% of globally or internationally invested portfolios. But the firm also has done some switching from large-capitalization to small- to midcap stocks. Overall, typical portfolio holdings of small- to midcap stocks now run about 20%, said Iain Clark, chief investment officer.
Scottish Widows Investment Management Ltd., Edinburgh, Scotland, now has about 6% in cash in global portfolios, vs. 4% to 5% at the beginning of the year. Instead of raising cash any further, the firm chose, starting in July, to invest in U.S. index-linked bonds and now has a 3% exposure to this sector, said Robin Garrow, global strategist.
For clients who don't have to be fully invested, Acadian Asset Management, Boston, now has on average "more cash than normal," but not as much as 10%, said John Chisholm, senior vice president and portfolio manager. More importantly, the firm is emphasizing medium- to smaller-cap stocks, he said. In its core non-U.S. equity portfolios, about 20% of the portfolio is now invested in stocks with a market capitalization of more than $20 billion, while 80% is in market caps of less than $20 billion.
'Interesting' opportunities
Meanwhile, executives at Clay Finlay Inc., New York, don't disagree that good investments are now harder to identify. But they are finding within markets "interesting (stock) opportunities," said Mark Ahern, principal.
For example, in Japan, the firm likes exporters and some software companies and financial firms on a selective basis.
And in Europe, Clay Finlay likes stocks that fall into the themes of restructuring, as well as industries, such as pharmaceuticals and electronics that benefit from educated work forces, and companies related to tourism and luxury goods.
In August, Murray Johnstone International, Glasgow, Scotland, increased cash, which climbed to 6% from 4% in its core international portfolios that are measured against the MSCI-EAFE index.
But last week, as it viewed the interest rate climate improving in Europe, the firm trimmed cash to 3% - which is a more normal level for the firm.
Reinvested funds went into the markets of Spain, which now accounts for 4% of Murray Johnstone's EAFE-type portfolios; Belgium, now 3%; and France now 6% to 7%, said James Clunie, investment manager and part of the firm's country allocation team.
Some are bullish
A number of other firms have remained bullish, or at least heavily invested.
For example, State Street Global Advisors, Boston, has a philosophy of staying fully invested, said Managing Director Robert Furdak. But in any case, the firm sees such "interesting opportunities" as recently hit Singapore, as well as Norway, Italy and, to a lesser extent, Germany. He also mentioned Japan and the emerging markets.
Edinburgh Fund Managers, Edinburgh, Scotland, doesn't "see any problem with inflation .*.*. interest rates and the bond markets," said Mike Balfour, CIO. In turn, it doesn't have "any problem with equity market valuations," Mr. Balfour said.
Overall, Edinburgh expects an average 10.5% gain by world equity markets in the next 12 months. Its portfolios are overweighted to continental Europe, underweighted in Japan and slightly underweighted to the U.S. market.
New York's Dreyfus Corp. "likes a lot of (markets) - Italy, Germany, Sweden, Finland, Mexico," said Ron Chapman, head of international equity. To him, new economic premises already have taken hold.
American "investors have seen the changes that corporate governance has brought and the changes in labor flexibility and in corporations sourcing production globally," he said.
"Many of these same effects will be felt in Europe in the next couple of years because Europeans are making the same types of changes in their economy," he said.
Thus, he believes the Continent's business cycle can endure longer than some traditional measurements would say.
Not surprisingly, then, he finds the Continent to be "a pretty attractive place for investment now."
