Sentiment towards equities still weak
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Philippa Yelland is a journalist with InvestorDaily, a Morningstar publication.
Investors may be permanently reducing their allocations to equities and turning to alternative asset classes for income and growth with less volatility.
Colonial First State Global Asset Management (CFSGAM) investment markets research senior analyst Belinda Allen said interest was growing in alternative asset classes that could deliver income and growth with lower volatility.
CFSGAM and the University of Western Australia's Business School have just published the first results of the Equity Preference Index (EPI), which measures managed fund data to gauge investor sentiment.
AMP Capital head of alternatives Suzanne Tavill said people appreciated the need for long-term perspectives on their savings, but it was hard to do that as equities fell, particularly with choice, which allowed a complete penalty-free, no-hurdles switch.
Fidelity Worldwide investment director Tom Stevenson said that to understand what might be the end of the equities love affair, it was necessary to understand how it began.
Allen said the index showed investor sentiment towards equities, as measured by actual investment, continued to be weak, despite recent survey-based results suggesting an uplift.
All age groups over 35 had a "low preference for equities," she said.
"Surprisingly, the 35-49 years group showed similar investment behaviour to those of the 50-59 years bracket," she said.
If a permanently lower preference for equities was occurring, she said, then alternative investment products would be needed "to help investors through the accumulation phase as well as providing the important source of income through the drawdown phase".
Tavill said that, as equities fell, it was hard for people to stay on that course.
"This in itself may not be a problem because traditional balanced portfolios have probably been too heavily exposed to equities anyway," she said.
"But this does become a problem over the longer term, because investors generally switch into defensive asset classes like cash and, as the evidence shows, it is hard for investors to switch back out."
In the absence of a heavy equity exposure, alternative investment products suited investors in the accumulation phase. A number of sectors such as private equity could underwrite a return even superior to the long-run expected return of listed equities.
"The rub is that these are generally illiquid - being locked up for anywhere from three months to 10 years," Tavill said.
"This does not fit with the regime of choice and the focus that the regulatory bodies have on ensuring portfolios can meet the switching requirements of their members. This therefore caps any exposure to alternatives to a sub-optimal level. It's unfortunate that providing choice should have such a side-effect."
Stevenson said the end of the affair with equities lay in its beginnings.
"Modern portfolio theory argued that a diversified portfolio of shares could maximise returns and minimise risk," he said.
"Immature pension funds with liabilities far in the future saw equities as a source of capital growth and a good hedge against inflation.
"Equities had massively outperformed bonds in the period since the end of World War II. People bought shares because they had watched them rising."
Many of these factors had reversed, and shares had underperformed bonds for much of the past 20 years.
In the global financial crisis, correlations between and within assets massively increased, undermining the case for diversification.
"The net result of this fundamental change has been a dramatic de-rating of equities compared with bonds, effectively returning us to the world that existed before the cult of the equity when investors viewed shares with suspicion and demanded a better income from them as compensation for their higher risk," Stevenson said.
The exception was emerging markets, where better growth meant equities were still seen as a route to capital appreciation.
"Equities are cheap relative to bonds but could stay that way because the conditions that triggered the cult of the equity 50 years ago - in economic growth and demographics - are not in place," Stevenson said.
"A word of caution, though. In the early 1980s, equities were written off in exactly the same way, with magazine covers heralding the end of equity investment, even as a 20-year bull market was kicking off. As Mark Twain almost said: 'Reports of the death of the equity have been greatly exaggerated.'"