As you are probably aware of, fund managers tend to be slightly biased towards optimism. This has actually paid off pretty well for them when it comes to forecasting returns on US equities. In fact, their predictions even turned out to be on the cautious side.
S&P 500: a fund manager favourite
Only in three out of 12 months, were asset manager expectations somewhat neutral (see box).
During the entire rest of the analysed period, fund managers were in aggregate expecting returns in excess of 5%. They started the year on a cautious note, only to screw up their expectations in March as many US companies were beating earnings forecasts.
The S&P 500 comfortably lived up to fund manager expectations in 2014, generating remarkably stable annual returns which exceeded 15% each month until November. This was largely a repeat of 2013, when US equity fund manager predictions were right even for each month of the year.
Methodology: in the graphs, we compare what fund managers predicted would happen to the index over the following 12 months (the bars) to the actual performance (the dots). The bars use the left-hand scale and go from -100 (all managers think the market will drop 5% or more in the following 12 months) to +100 (all managers think the market will rise 5% or more in the following 12 months). The dots use the right-hand scale to what actually happened to the market. The red line indicates a 5% market gain. If the spots match the bars then mangers predicted correctly. For the manager predictions, Skandia collects every month the house views of 15-20 global fund management groups.
Just as right for small caps
For US small cap equities, the picture is very similar. Russell 2000 returns comfortably exceeded the 5%-mark every month, repeating the performance pattern of the previous year. Unlike last year, when fund managers underestimated the actual performance of the index in nine out of 12 months, they were pretty accurate this time around.
All in all, fund manager predictions for US equities seem quite reliable. At the moment, two thirds of asset management companies foresee US equity returns in excess of 5% for next year. So, despite valuations looking pretty demanding at the moment, you would probably do wise increasing your exposure to the asset class.
Next week we will scrutinise fund manager ability to predict returns for a slightly more volatile asset class, emerging market equities. So keep an eye on this website!