As fund managers come back from their sun beds they will now focus on how to approach the final stretch of the year. Hedge fund performance continues to look weak; the Credit Suisse long /short hedge fund index is up just over 2% year to date (end August). The one hedge fund area that has done better than most is the event-driven funds, whose focus is mainly on mergers and acquisitions, but at circa 5% that performance is just about in line with the S&P 500. Whether that poor performance has come from an overly cautious approach or an inability to leverage in this new environment one can only speculate. Balanced equity funds are up just over 3% this year, looking at the performance month by month they too seem to have been taking a cautious approach.
Many fund managers will continue to feel like they sit between a rock and a hard place, as they decide how best to address the coming months and where their performance will come from. One can quote many a good reasons to be cautious: Ukraine and the Middle East uncertainties; the possibility, no matter how remote, that interest rates in the US could rise; or concerns around the strength of the global economy. Bears will point to the recent sell-off in the market leaders such as high yield and the Russell 2000. Société Générale’s Albert Edwards, affectionately known as an uber-bear for his long held belief that equities markets remain on the cusp of collapsing, was once again on the prowl last week claiming “he can hear the hissing of the stock of the stock market bubble bursting”. Mr Edwards believes that corporates using cheap money are the main drivers of stock markets, and there is now a mountain of debt piling up US corporate balance sheets. He was delivering a similar message 3 years ago. The trouble with being an uber-bear in a bull market is that, although one day you will be right, in the interim you can miss a lot of opportunity.
So there are plenty of arguments for caution, but fund managers will also see markets continuing to creep higher and earnings forecasts creeping up. Valuations aren’t out of kilter with history, loose monetary policy will remain for a while and, as one can see from the Merrill Lynch surveys, cash levels remain historically high, so by remaining cautious you are in with the crowd.
As fund managers return from the seaside they will debating long and hard whether the investment waters remain similar to the ones they have come from, inviting, or are they about to jump in as the tide is going out. Our view remains strongly that while there are the likes of Mr Edwards out there beating the bear drum, equities can, with the odd hiccup along the way continue to climb the wall of worry.