Institutional money continues pouring into equity markets

With the bond bull market coming to an end, equities have been seeing growing net inflows from institutional investors, despite stock markets' recent declines.

Although U.S. equities slipped during the week of April 7, they're still going quite strong, relative to the market's nadir in 2009. As of April 11, the Standard & Poor's 500 index was up 168% from its low point on March 9, 2009.The Nasdaq Composite was up 215% in the same period.

“We're actually deep into a mature equity bull market,” said Alan Dorsey, managing director and head of investment strategy and risk at Neuberger Berman Group LLC, New York. “We still have quite a bit further to go.”

Investors looking for growth and high returns are turning back toward equities, particularly European and emerging markets equities because they are cheaper than U.S. stocks.

Paul Atkinson, head of North American equities at Aberdeen Asset Management, Philadelphia, told Pensions & Investments in a phone interview that as news of strong corporate performance began to emerge, investors “began to embrace more risk, come out of bonds and gravitate more towards equities” in the last two years.

He added that Aberdeen, which has $320.6 billion in assets under management, has “seen some flow in the U.S.,” particularly in the smaller-cap stocks, which are more leveraged.

“The equity market has been a longer-than-average bull market over the past five years,” said Mark N. Stahl, a senior vice president in Callan Associates Inc.'s global manager research group, San Francisco. “The statistics and return would show that, which has been great to see.”

Indeed, the number of equity mandates has been rising. According to a report released in January by Louisville, Ky.-based manager consultant Eager, Davis & Holmes LLC, both U.S. and international active equity mandates rebounded in 2013. In 2013, 373 U.S. active equity hires were made, up from the 305 made in 2012 and the 288 in 2011.

Chris Adkerson, a principal and senior consultant in the St. Louis office of Mercer LLC's investment business, said his firm saw a return of 32% in equities in 2013 after seeing roughly $431 billion go into equities that year (following an average of about $40 billion each year from 2009 to 2012 inclusive). Comparatively, Mercer saw $1.2 billion go into bond funds in 2013. Mercer's investment management division has $86.7 billion in AUM.

“Investors are seeing the returns in equities and jumping on board,” said Mr. Adkerson. He added, however, that his guess is that an equity bull market “is entering the final stage,” as he finds it “unlikely that we'll see a 30%-plus return in 2014.”

Not everyone shares this belief. Ashi S. Parikh, chairman, CEO and chief investment officer of RidgeWorth Investments, Atlanta, for example, believes that, rather than this being the end of an equity bull market, we're facing the prelude to a shift away from bonds towards equities.

“You can argue we're in an equity bull market,” he said. “I don't think we've seen that full-blown shift yet. I think it's still coming.”

RidgeWorth Investments manages $50.6 billion in assets.

Of the investors returning to equities, many are turning toward international equities, particularly those within Europe and emerging markets, which are expected to continue to rise. Data from Eager, Davis & Holmes shows that 291 active international equity hires were made in 2013 — a record high — compared to 271 hires made in 2012 and 210 in 2011. Of these hires, the majority of them — 136 — were in emerging markets equity, also a record high.

With U.S. stocks becoming more expensive and expected to see returns lag those of 2013, and with Europe coming out of a decline, European equities are becoming increasingly attractive from a valuation perspective to investors looking to generate high returns, according to a number of money managers interviewed by Pensions & Investments.

Now that “the euro crisis is in the rearview mirror, the industry is having a strong look at Europe, and rightly so,” said Aberdeen's Mr. Atkinson.

Neuberger Berman's Mr. Dorsey agreed. “Where to invest is a global question. In addition to global equities, we have been also focused on European equities and emerging markets equities,” he said. “European equities are clearly cheaper than (U.S.) equities.”

In addition to European stocks, emerging market equities, which were regarded as more trouble than they were worth just 12 months ago, are not only another area where investors are looking for returns but also a good source of portfolio diversification.

“In the emerging markets space, increased diversification is on everyone's mind,” said Mr. Stahl. “The opportunity to grow is also a fundamental economic indicator.”

Churchill G. Franklin, CEO of Acadian Asset Management LLC, Boston with AUM of $65 billion, said six years after the global financial crisis of 2008, many investors are asking whether they should seek or avoid risk. Those who are seeking risk, based on what Mr. Franklin has seen, have been turning toward emerging markets, frontier markets and small-cap equities. “If institutional investors are comfortable with those (strategies), then they can get behind global equities,” he added.

Most money managers and consultants contacted by P&I agreed they hadn't been seeing flows coming out of fixed income and into equities as much as they have seen investors reallocating within their fixed-income and equity portfolios.

From Mr. Stahl's viewpoint, although there have been some positive inflows into international small-cap, emerging market equities and global equities, this doesn't mean there's been a shift out of fixed income into equities.

Similarly, Jeffrey Levi, a director at Casey, Quirk & Associates LLC, Darien, Conn., is seeing a significant number of investors restructuring their fixed-income portfolio. Of these investors, one portion is seeking yield in their fixed income allocation, taking a more unconstrained approach. Meanwhile, another group is adopting a more liability-focused approach.

“In addition, some investors are taking a more alpha-beta approach and using passive fixed income for beta and seeking a different set of managers for alpha,” he added.

In terms of equities, Mr. Levi also noted that “a lot of the money has moved back to equities, but I'm not sure it's this broad shift from fixed income to equities. It'll be shifting within the asset classes.”

Over at RidgeWorth, Mr. Parikh has been seeing some rebalancing of some allocations back to fixed income. “It's not like there's been this wave of new money coming in,” said Mr. Parikh. “But we do think while markets are in a bull market, we haven't seen flows (into equities) just yet.”

Edward Crotty, CIO and portfolio manager of Great Falls, Mont.-based boutique Davidson Investment Advisors, said his firm, which manages a total of $1.2 billion — 40% in fixed income and 60% is in equities — has seen flows from fixed income into equities, primarily thanks to rising interest rates putting pressure on bond prices.

“There are flows moving into equities from fixed income, but the need for fixed income doesn't go away,” Mr. Crotty noted. Roughly 30% of Davidson Investment's AUM is institutional.

This year, Mr. Dorsey observed, there appears to be more of a focus “on the specific implementation choices for making money going forward.” Whereas “last year was an equity bet for most investors, this year you have many investors making many different choices in how to make money this year,” choosing different asset classes, styles and sectors. n