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managers misled by recent returns

Analysis of the EIE Manager Sentiment Survey database – a record of fund manager predictions compiled in association with Skandia – indicates a high degree of correlation between the one-month return of an index and expectations for its performance over the following year.

For example, the chart below shows fund manager sentiment on continental European equities since July 2004 – ranging from minus 100 (every manager thinks the asset class will drop by at least 5% on a one-year time-horizon), to plus 100 (every manager thinks it will go up at least 5%).

Also plotted is the percentage performance of the FTSE World Europe ex UK Index in the month prior to when the survey took place (purple line/right-hand scale).

As can be seen, the two lines track each other throughout the period – the clearest exception being late-2008 and early-2009, in the aftermath of the collapse of Lehman Brothers, when rebounds in European equities were insufficient to improve the outlook of traumatised investors.

But while fund managers as a group appear to be strongly influenced by recent performance, subsequent one-year returns often fail to match expectations.

Survey participants largely failed to predict the strong performance of European stocks during the past 12 months, for example, remaining neutral in aggregate for most of 2012.

Platinum members can view the latest Expert Investor Europe Manager Sentiment Survey results here.

tom@ybc.tv

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