So where are the best investment bets to be found in 2005? A trawl through a selection of end-of-year economic reports reveals, as one might expect, a fair degree of consensus among fund managers with regard to the outlook for different geographical regions and asset classes.
Given the stumbling, single-digit performance of the past year, no one is wildly enthusiastic about the prospects for the UK and US equity markets. Returns on equities over the next 12 months are predicted to be modest on the back of moderate growth and a low inflation environment. Despite a rise of 12 per cent in the FTSE All-Share index since August, Schroders urges caution, maintaining that sustained UK returns are dependent on further oil price falls.
F&C believes the best returns from equities will come from continental Europe and emerging markets rather than Anglo-Saxon markets. Mr Broccardo is bullish about European corporate profitability, maintaining that earnings momentum is “clearly superior” to the US.
Aberdeen Asset Managers, which also sees market conditions in 2005 conducive to stock-picking, is neutral about European equities, while noting that some countries such as Germany offer reasonable value.
Most asset managers expect emerging equity markets to outperform developed markets. Schroders expects emerging market returns to at least equal estimated earnings growth of 10 per cent. The firm is watching emerging market stocks that are beneficiaries of domestic rather than global demand. F&C’s Mr Broccardo says emerging markets will be buoyed by rising commodity prices, increases in foreign direct investment, improved corporate governance levels and decreased debt. Aberdeen, while optimistic about Asia, offers a sober assessment of the region, with corporate earnings growth expected to moderate to about 8 per cent.
Good year for bonds
Schroders’ global head of fixed income, Bob Michele, predicts corporate bonds to rally in 2005 as firms continue to improve their balance sheets and default rates decline. In the government bond arena, he believes UK and eurozone bonds offer better value than US Treasuries. He adds that Asian bonds and US mortgages offer investors the best return opportunities.
Anton Simon, head of high yield at Putnam Investments, predicts a good year ahead for high yield bonds. He says companies are rebuilding their balance sheets and this is generating credit upgrades, IPOs and M&A activity; all events that have a positive bearing on the asset class. The default rate is also forecast to be low.
So how will all the regional and investment analyses translate into products and marketing strategies in 2005? Expect a lot more noise from fund managers about liability-led investing, tactical asset allocation, portable alpha and enhanced indexing, all products aimed at risk-conscious investors who yet seek that elusive outperformance. Such strategies give asset managers scope to stretch their investment muscles.
Investors will also be exhorted to buy more corporate bonds, inflation-linked bonds, collateralised debt obligations and exchange-traded funds as managers seek to capitalise on growing asset diversification.
Alternative investments will continue to loom large as managers push their property, private equity and hedge fund investing capabilities. Of the three strategies, hedge funds are likely to disappoint both promoter and punter alike. One the one hand, research by Greenwich Associates shows that continental European institutions have not matched their declared intention over the past three years to invest more in hedge funds with hard mandates. When the time came, many lost their nerve, says Greenwich.
Those institutions that have invested are faced with the problem that the proliferation of hedge funds has made it extremely difficult for them to profitably exploit market inefficiencies. And as Merrill Lynch Investment Managers noted recently, the need for high cost hedge funds as diversifiers has lessened as the correlation between shares and bonds has reduced.
The hedge fund experience serves as a salutary reminder that asset managers have failed over the past five years to educate investors about such absolute return strategies. Much ignorance and fear remains to be dispelled.
As asset managers busily extend their product ranges, beef up their investment expertise and ratchet up the sales rhetoric, they should not forget that their efforts to woo the alpha generation will depend greatly on the coherence and clarity of that marketing message.
Henry Smith, editor, henry.smith@ft.com
