However, much of this improvement has already been reflected in markets during a barnstorming year in 2013. For managers of managed funds, the key dilemma for 2014 is whether to stick with risk assets, or take profits while they can.
Another dilemma for asset allocators is that many were already at maximum weightings in risk assets such as equities for much of 2013, so the option to increase risk further is not available. For example, in the Mixed Investment 40-85% shares sector, the average manager was already more than 80 per cent weighted to equities. The Mixed Investment 20-60% shares sector average equity weighting was roughly 50 per cent, so there remains greater room for manoeuvre. But those managers with lower equity weightings have tended to have higher weightings to riskier bonds, such as high yield.
Valuations are not as compelling as they were at the start of 2013. The price/earnings (p/e) for the S&P 500 is currently 18.9x, against 14.8x at the end of last year. The UK market is trading on 14.4x, versus 12.6x last year. Only selected emerging markets have seen their valuations fall over the past year, such as China (from 8.2x to 6.8x).
Those still overweight in equity markets are relying on its continued momentum and its relative attractiveness compared to bonds, rather than being convinced of its inherent value.
A number of managers of managed funds are selectively reducing risk in their portfolios. David Hambidge, head of multi-asset at Premier Asset Management, says: “We are reducing risk at the margin. The market may not have finished its move higher, but it has probably had the best of its returns. 2013 will go down as a vintage year for equities, particularly smaller companies and in Japan. This is where we are taking profits at the moment.”
Mr Hambidge has not moved the overall equity allocation down on aggregate because he still likes equities relative to bonds. He has continued to increase the property weighting across his income portfolios - it is now up to 15 per cent. He adds: “There is certainly no euphoria in markets; there is cautious optimism at best and we are expecting markets to have a positive year, but volatility will pick up.”
James de Bunsen, multi-asset fund manager at Henderson Global Investors, believes that if not euphoria, then at the very least complacency has crept into valuations: “We’ve been cautious for a few weeks now. For equities to go on rising in 2014, earnings growth has got to come through. Last year’s stunning performance from developed markets (with the exception of Japan) was mainly predicated on share buybacks and multiple expansion, neither of which are positives for future performance. If companies are buying back shares it means they are not investing for future growth via hiring or capex.”
There are a number of multi-asset managers willing to take on more risk, but only in selected areas. Paul Niven, head of multi-asset investment at F&C Investments, says that while economic growth will not necessarily translate into an improved performance from commodities, the outlook for emerging markets is improving. Although investors are continuing to move assets out of emerging markets, the promise of continued loose monetary policy in the US may stem the flow.
This chimes with the views of multi-managers such as Gavin Haynes, investment director at Whitechurch Securities and Tim Cockerill, head of research at Rowan Dartington, who have been taking a greater interest in China, believing that valuations have now moved to a level where opportunities are emerging once again.
There is certainly no wholesale re-embracing of risk among managed fund managers to reflect the improving environment. Most have either made their money in 2013, or recognised that they are too late to the party. However, there is selective interest in underperforming risk assets such as emerging markets, which may start to do better in a climate of global recovery.
Cherry Reynard is a freelance journalist
WHAT DO THE EXPERTS THINK?
With risk likely to be an important focus in 2014, Investment Adviser asks industry experts whether they think investors are taking too much risk, sometimes without knowing it?
Martin Bamford, managing director and chartered financial planner at Informed Choice:
“There is a big chance that investors in managed funds and risk-rated funds do not truly appreciate the levels of risk they are taking with their money. Understanding of risk is best developed through a collaborative advisory process, which formulates investment advice by following several important steps. When using a managed fund or risk-rated funds, investors often skip these important steps, instead relying on the name or aim of the fund that has been recommended to determine how much risk is being taken.”
Justin Modray, founder of Candid Financial Advice:
“Risk-ratings perhaps can be too simplistic. Just because a fund is risk-rated this does not mean advisers should believe they do not need to stay on top of the investment – checking ongoing suitability is of the utmost importance.”
Helen Kanolik, founder of HelenK Financial Advice:
“It is part of a bigger problem in that investors don’t understand risk. Risk-rated funds can give them a degree of confidence that might not be warranted. It means you have to have a thorough discussion about risk and manage expectations.”
Adrian Lowcock, senior investment manager at Hargreaves Lansdown:
“The underlying investment still needs to be researched and reviewed to ensure it is appropriate and suitable for clients and the adviser fully understands how it will behave in different circumstances.”