the uncertain future

Chaired by EIE editor Dylan Emery, panellists debated several topics including the outlook for markets in 2013, the merits of active and passive strategies, and why some US portfolio managers fail to make the right impression with European investors.

Dylan Emery: What is your outlook for markets this year?

Joachim Klement, Wellershoff & Partners: At the moment I’m concerned about France. Because, in my personal view, the country is going down the drain. It has to cut its budget deficit, it has to raise taxes, and at the same time the economy is tanking. So France is certainly going to be a problem. We are in a situation where we’re starting to become overly complacent about risk assets again and, sooner or later, we’re going to see another bear market start in equities.

Alexandre Garrabou von Trotha, Sabadell Inversión: That’s my big fear too. I’m worried about the general optimism I see [regarding] the supposed global macroeconomic recovery we are in. Essentially, nothing has changed very much. The excess of leverage – public debt and private debt – in almost all developed countries, is still there. What we are seeing now is that there are differences between regions. The US still have to address [their debt] but at least they are growing. In Europe we are not growing at all.

JK: As an equity investor, I don’t care about the level of growth – I care about expectations of growth. And this is where my bone of contention comes in. Because everybody expects the US to grow, not [strongly] but solidly – somewhere in the region of 2% this year. But we’ve tortured our data for the US back and forth and couldn’t get it to confess to 2%. We are more in the range of 1% or lower.

Stefania Taschini, Anima: Our view has changed a bit. Obviously 2012 was a surprising year, because everything in the market – fixed income, risky assets, equity – was up. And we think that was too optimistic. Because I agree that the euro crisis is still there. We still see a big difference between the core countries and weaker countries such as Italy, France, Spain. So we don’t think the crisis is over.

DE: Do you fear another bear market?

ST: I think this year will be very difficult, because we will see a lot of volatility. There’s euphoria in the market, because the appetite for risk is there. But there are also several problems to solve. For this reason, we don’t have an overweight to equity. We are neutral – wait and see.

Tristan Delaunay, Athymis Gestion: I have mixed opinions because something important occurred and I haven’t seen it written about much. It’s about correlation in the market. Correlation is decreasing and quickly, and now you’ve got Asian markets which behave [in different ways] – you’ve got the Chinese market, you’ve got the Japanese market. You find again interesting de-correlations through markets and through regions. So the consequences of the specific problems of the eurozone are big. And I’m very worried about France and Italy right now, and for the months to come – I think if there is a crisis, it will come from one of these countries. But financially speaking, I’m less worried than before. Because everybody knows that the eurozone is a problem and it’s not going to be solved right now.

JK: That’s the crucial difference. Everybody knows Italy is a basket case – it is a disaster. So there isn’t much negative surprise potential there. But with France it might be different. Because I think a lot of people are getting worried about it but many are not quite there yet. And the risks, in terms of expectations, come from different places. That’s why I mentioned the US – because to me, that’s the place where people are too complacent.

Åsa Norrie, Standard Life Investments: I am concerned that we have the [German] elections in September, which means that everyone is in a state of uncertainty. Because we’re waiting and there’s a lot of cash sitting on P&L and balance sheets. But no one is going to do anything before Q4, if at all, once the elections are passed. I thought I was going to be controversial, [by saying] that fixed income and credit is going to be a theme this year. I assumed everyone else here would be bullish on equities. But I think we’ll see people going into different shapes and forms of fixed income – because of regulation and because of wider concerns, rather than valuation. And I think that’s going to be a big theme this year.

JK: This poses another problem. Institutional investors are, to a large extent, exposed to fixed income investments. For a couple of years, we’ve had this hunt for income. Your govvies give you 1% or even less – in Switzerland we have negative interest rates up to four years. And everybody is going into investment grade, and now high yield and emerging market bonds. Everybody is just looking at coupons, coupons, coupons. And let’s face it – a high yield bond is called a ‘junk bond’ for a reason. I’ll give you an example from the ’80s, when US treasury yields dropped below 10%. People were used to getting 10% or more with their treasuries, and they moved down the credit ladder into corporates and high yield. What it fuelled was essentially the high yield boom, and the savings and loan crisis was one of the outcomes of the high yield market crash. The credit spread you get at the moment is very low. And all it takes is some worries about the economy – your spread widens, and you have a 5% drop.

DE: Has anyone made an investment decision recently which might surprise people?

Vasco Nuno Jesus, BPI Gestão de Activos: Yes, I made one which surprised even me. We are an active house, we believe in active managers, and we have always pursued active management. Basically I concluded about a year ago that it was difficult to do what I love to do, for the US. So we started to shift slowly into passive. [Passive investing] is something I don’t agree with, but it was an equilibrium thing – if I could not do it properly, then I might as well do it [cheaply]. And in the US, you have something like [the SPDR S&P 500 ETF] which does pretty much the S&P total return, with low costs. The US is the most efficient market in the world – the percentage of people who actually beat it is very small. So on 1 Jan this year, we moved all of our US third-party allocation into passive. Which is something that if you had told me two years ago I would do, I would have said: “No, we will never do that”.

DE: Are you saying active fund managers who outperform efficient markets are simply lucky?

VNJ: No, I believe in active management and I select managers. What I’m saying is, for me to do [US active fund selection] properly, I need resources and time I don’t have. Therefore I have moved into passive, and can focus on where I add more value – for example, in global emerging market equity.

JK: Would you say it is more difficult now, than a year or two years ago, to find outperforming active managers, or highly skilled active managers?

VNJ: No. For me, it’s the same.

ST: It depends. I agree with [Vasco], because we have the same problem in the US, where we find that it’s difficult to find managers who outperform consistently. All I can add is that it’s a matter of style. We can find good growth managers or value managers, for example. But in that case, implicitly you are taking an allocation bet. We do not buy passive – ETFs or things like that. For part of the allocation, we use S&P futures. And for the rest, we try to avoid bias. So we balance the allocation, by buying good value managers, good growth managers and some good, core blend managers.

VNJ: That’s exactly what we used to do. We have access to these types of managers – some are in Europe, some come to Europe. Let’s say I see 100 European equity managers per year and I choose five. The number of managers I need to see, in order to be comfortable with my decision in the US, is a lot [higher]. In theory I would have to see probably 300 a year, to choose a portfolio of ten.

TD: Sometimes it’s too difficult [to find active managers]. Think about Asia, how to find a good manager – it’s worse than the US. And the US is difficult, because I think [US fund managers] don’t work a lot when they come to Europe. They think it will be okay and everyone will buy their funds. The communication is bad. The reporting is bad. They don’t care about Europe when they come here.

DE: So they have a different attitude, in the way they market themselves here?

VNJ: Of course. I know immediately if [a manager is] American or not – with my eyes closed, just by listening. Because it always takes twice the effort to grasp the reality.

TD: There is only the process. They don’t speak about any stock in the portfolio.

AN: We work with Sumi Trust in Tokyo – they manage all of our Japanese equities, and we do a lot of their global equities and multi-asset investments. But it took me a long time to understand why they refused to comment on big Japanese stocks. It is because they’re massively important investors in these companies. And there is an understanding between companies in these countries that they will not comment. I’m a Finn – I’m quite blunt and straightforward. But they will not give me a yes or no answer, on whether they would buy or sell a stock.

AG: I agree with all the difficulties I’ve heard here– you have to make a huge additional effort [with US managers]. But so far we haven’t lost our faith in active management. The proportion of funds we are able to find, in terms of long-term consistency that beat the [index], is much smaller in American big caps than Europe or anywhere else. But we still have found a few. So we still stick to active management.