Great Rotation portfolio risks becoming crowded
The shift into higher-return equities out of low-yielding bonds is one of the top investment themes of 2013, driven mainly by US private pension funds and retail investors.
But recent plans by Japan’s $80bn (€59.9bn) pension fund to increase equity weightings at the expense of bonds and Norway’s move to boost stocks and cut some bonds highlight a greater involvement from the world’s biggest and influential investors.
The sheer size of these funds means even a small switch in their asset allocation could easily elevate prices, raise valuations, and close the value gap equities offer over bonds.
“It’s now driven by almost all types of investors. If you take a rational decision and try not to time the market... equities are still the most attractive asset class,” Dirk Wiedmann, head of investments at Rothschild Wealth Management said.
“We’re all being forced to take equity risks. We do it because it’s the most attractive of not so attractive options.
“Do I feel very comfortable? The answer is no... the fundamental case for equities is weakening.”
According to most recent estimates by Thomson Reuters Lipper, equity funds and exchange-traded funds had net inflows of $60bn in the past four months, which represents around 0.8% of total assets.
Bond funds and exchange- traded funds had net outflows of $22bn, which represents around 0.5% of total assets.
In June alone, net outflows from this group were $78bn, or 1.7% of total assets.
The pension fund for Japan’s civil servants is considering changing its strategy to allocate more of its $80bn to stocks and less into domestic government bonds.
Its current asset mix may almost guarantee a capital loss — it invests nearly 80% in Japanese Government Bonds and just 5% in domestic stocks.
The move follows the $1.2tn Government Pension Investment Fund, which raised its Japanese stock allocation in June to 12% of its portfolio from 11% and lowered JGB holdings to 60% from 67.
Norway’s $760bn sovereign wealth fund has increased equity holdings to 63.4% of its portfolio from 62.4% three months ago and cut its government bonds weighting, especially in Britain.
“It is less a reflection of our enthusiasm for equity markets and more a reflection of our lack of enthusiasm for bond markets,” Yngve Slyngstad, chief executive of the Norwegian SWF, told reporters on Friday.
But just as long-term investors join the equity rally, reasons for aggressively buying equities may be becoming less compelling.
Bank of America Merrill Lynch says the Standard & Poor’s& 500 index has been in a bull market for more than 50 months since Mar 9, 2009, nearing its historical average since 1932 of 57 months.
Valuations are starting to be unappealing.
The Shiller price earnings ratio — which measures equity prices relative to average earnings over the past 10 years — stands at 24, above the long-term average of 16.
“Valuation on balance is OK but not a screaming buy,” Wiedmann said.
Rothschild is hedging almost half of its equity positions using derivatives.
