Thursday, 15 October 2009
Do fund managers have a crystal ball? Naah...
Merrill Lynch, the US investment bank that lost its independence because of its belated dabbling in Subprimes and scant risk controls, have for years made a survey of a large number of fund managers worldwide, who control huge amounts of invested money (229 managers, $600bn+ of assets). The survey for October has just been released, and it is sobering reading.
To those who have been on Mars for the last year, the stock market turned in March, and has since then seen a bull run a bit stronger than the average post-recession bull runs this century. Now, how have fund managers handled this situation?
The first thing to notice is that in March these good people were divided in two camps of roughly equal size: half believed that economic growth and corporate earnings would improve going ahead.
The other half believed that things would get worse. Since then, things have improved and now about 80% say they are optimists. Earnings and economic growth will improve in 2010.
Nevertheless, fund managers – despite their oft-repeated claim to being ahead of the trends – have been distinctly slow to come out of the starting blocks. It took four months until 50% were overweight in shares. The other 50% were still underweight. In other words, half of the fund managers of this world were still underweight when the market had rallied 35% or more.
Obviously, most of the fund managers now claim to believe that earnings will improve by more than 10% in the coming twelve months and that there is no major risk of a setback anytime soon.
Let us try to present this in a slightly more cynical way. In March about half of the fund managers had seen what where earnings and growth were heading. Four month later, most fund managers had got it right in terms of understanding what was happening. But still only half of them had managed to react to their convictions and raised equity positions to overweight. Half of them had missed the bull market and were still underweight. Fast forward to September and 80% now claim to be overweight.
It means that 20% are still underweight. 30% are overweight but missed out on the rally from March to June. Both of those groups must logically still be lagging behind in terms of relative performance.
And now for the interesting question for the market: what will these fund managers do in the near future? They are approaching New Year, and they did not manage to get in on a regular post-recession rally in time. Shareholders and investors will begin to ask serious questions as the fund managers lost money 2008 and will have underperformed in 2009.
Not a good situation – in fact that is the kind of situation designed to cut a career short. So my guess is that an uneasy feeling is creeping in. This could well confirm a perception that this market rally has good legs because of all those (50%) whose relative performance is still lagging and who see no other means than to increase their equity holdings as the year draws to a close.
So much for crystal balls and being ahead of the trend. Also among fund managers about half get it right and half get it wrong when they guess about the future. And there appears to be a distinct time gap between understanding and putting the understanding into action. Believing that fund managers are ahead of the market could seriously damage your wealth.