Our researcher visited the city in mid-December, and found that fund selectors had been buoyed by the European Commission’s decision a month earlier to approve the bail-out of four Spanish banks. Concerns over the eurozone, Chinese growth and the US fiscal cliff remained, but many professional investors viewed domestic assets as attractive and expected to add risk to their portfolios in 2013.
Indeed, interviewees at wealth management firms said a key challenge would be convincing shell-shocked clients to change their conservative mind-set and take advantage of opportunities in riskier asset classes. Many customers had taken refuge in low-volatility fixed income strategies, they noted, and were seeking merely to beat the headline inflation rate (about 3%).
Western equities
Domestic and European stocks appeal
European Central Bank data shows that Spanish-domiciled equity funds suffered net outflows in the first three quarters of 2012 (see graph 1) – continuing an unbroken run of quarterly outflows that began in Q3 2011.
However, investors’ growing appetite for domestic assets and risk means European equity funds are likely to enjoy greater popularity this year. Interviewees view the asset class as cheap on a risk/reward basis.
This tallies with our online poll of Spanish investors last September, which found two-thirds of fund selectors planning to boost their European equity exposure over the following 12 months (see graph 2).
This was the strongest reading for any asset class among this investor group. Demand for US equities is likely to be comparatively weak. Interviewees express little interest in US-listed stocks – in line with falling appetite in our survey data (see graph 3).
Emerging market stocks
Investors favour exposure to India and China
The September poll also showed a decline in the proportion of fund selectors planning to increase their developing world equity exposure (see graph 4).
Yet many investors we spoke to in December expect to boost their emerging market allocations during the next year. Interviewees are mostly focusing on opportunities in India and China. At least one investor is interested in companies exposed to Chinese consumers, although others worry about slowing growth. One of our interviewees expressed a desire to learn more about Brazilian equities.
However, there is a general lack of appetite for exposure to South American stocks more broadly – thanks in part to concerns over the actions of some governments in the region, notably Argentina’s decision to expropriate the local assets of Repsol, a Spanish oil company.
Government bonds
Some appetite for EM and peripheral eurozone debt
Spanish-domiciled fixed income portfolios saw outflows last year (see graph 5), in stark contrast with the sustained heavy inflows into similar vehicles elsewhere in Europe. Morningstar data shows that investors across Europe poured almost €160bn into bond funds in the first 11 months of 2012, compared with an outflow of €44bn in 2011 and an inflow of €97bn in 2010.
According to our September survey, developed world government bond strategies will be least popular among Spanish fund selectors in 2013 (see graph 6). Interviewees in December noted that many securities yield less than inflation, although some view Italian and Spanish sovereign bonds as underrated and attractive – consistent with their growing confidence in domestic assets.
There is also appetite for government bonds issued in the developing world. Our data indicates about two-fifths of Spanish fund selectors plan to boost their allocations here (see graph 7).
Corporate debt
Credit allocations likely to rise
Bonds from corporate issuers look set to remain popular, with more survey respondents planning to increase their investment grade allocations than cut them (see graph 8). Interviewees indicate that they are most likely to focus on riskier, high yield strategies.
Alternatives
Absolute return and property in demand
Away from equities and fixed income, professional investors are upbeat on absolute return strategies (see graph 9), as well as perceived opportunities in real estate. All of our interviewees seek portfolio diversification.
Active versus passive
Fund selectors want to hear new ideas
Interviewees have mixed views on passively-run products such as exchange traded funds, with those employing aggressive investment styles unlikely to use such vehicles. Fund selectors focusing on actively run funds say they are interested in managers with unconstrained approaches.
Richard Parkins (left) and Will Jackson (right), members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data.
For more information, contact Richard at richard.parkins@lastwordmedia.com or on +44 (0)20 7065 7584
