Buckle up for another bumpy ride in 2012?
Each quarter, we bring you the Investment Manager Outlook (IMO) based on the views of investment managers on the direction of the markets and trends on the horizon that could impact investment strategy. Many times, we find that these results have interesting implications for advisors and their clients – and this quarter is no exception.
In the latest survey, 70 percent of the money managers agree with what we heard from many advisors in the latest Financial Professional Outlook (FPO) – investors should stay buckled for another bumpy ride and expect continued market volatility in 2012.
This graph represents the portion of money managers (70% of the total) who selected YES to the question: “In 2011, U.S. equity markets experienced nearly unprecedented levels of volatility. Do you expect similar volatility levels to continue through 2012?” and “If yes, what changes are you making to your portfolio as a result of your volatility outlook (select all that apply)”? The graph is based on 142 responses to the survey collected between November 2 and November 11, 2011.
And as we saw with advisors in the FPO, most managers are drawing on their ability to look beyond short-term issues when evaluating whether changes to portfolio positioning are really necessary. In fact, 63 percent of the managers that expect continued volatility say that they are not planning any changes to their positioning.
Europe continues to weigh heavy on managers’ minds
While we’ve seen some progress recently within the Eurozone, the latest IMO suggests managers are continuing to keep an eye on the European nations generating headlines recently. This was made clear in the drop in bullishness for non-U.S. developed market equities in the latest survey to 33 percent – the lowest point since March 2009.
While some managers believe we will see resolution of the issues in Europe in 2012, most are still clearly concerned, particularly with the growing expectations of a Eurozone recession in the near future and the potential impact on the United States. Like many investors, managers likely want to see a more final “solution” for Europe laid out before they begin to expect lasting stability.
Managers hitting the brakes on risk?
In an environment with so much uncertainty and expectations of continued volatility, managers appear wary of having too much exposure to riskier asset classes – such as U.S. large cap growth equities (58 percent bullishness) and emerging market equities (56 percent bullishness)—which both saw considerable drops in bullishness compared to the September 2011 IMO survey.
We also saw managers express an increased interest in value equities across the market cap spectrum.
At 61 percent bullishness, U.S. large cap value equities led for the first time in survey history in terms of manager bullish sentiment, and U.S. midcap value and U.S. small cap value equities also saw notable increases in bullishness. With lower growth expectations across the globe, value stocks and particularly higher quality value stocks likely look attractive to managers in a relative sense.
High-yield bonds and corporate bonds also saw gains in manager bullishness in the latest survey. Since yields on U.S. Treasuries are currently at such low levels, higher yielding strategies, such as corporate bonds, high-yield bonds and high dividend-paying value equities, may be appealing options to managers.
Preparing for volatility
This year we’ve seen the markets take deep dives and a few exhilarating upswings. While it might be tempting to try to answer every anxious client’s question about portfolio performance, a better approach might be to help clients see how valuable a long-term plan is, when braving the volatility rollercoaster.
So, if the rollercoaster continues next year, how will you help your clients handle the ride with confidence rather than fear?