Afootballer, a fund manager, a religious leader and a student are on board a stricken aircraft – but discover that there are only three parachutes. The footballer leaps up and says: “I’m paid £100,000 a week because I’m so valued by my club – they can’t afford to lose me,” grabs a parachute and jumps out. Then the fund manager stands up and says: “I’m a financial genius who manages millions of pounds of investors’ money – they can’t afford to lose me,” and jumps out with the second parachute. So the religious leader turns to the student and says: “I’ve enjoyed the true riches of spiritual enlightenment – you take the last parachute.” And the student replies: “Hey, no worries, man – that financial genius just jumped out wearing my rucksack.”
At this point, I should make two apologies. I have plagiarised a terrible old American joke in which the part of the “fund manager” is more usually played by another divisively wealthy character (often Bill Gates). I have also suggested that fund managers might show themselves to be cowardly or cynical in times of uncertainty. But nothing could be further from the truth, to judge by their recent actions.
Fund managers have been jumping into equity markets with the courage of their convictions.
Last week, more than half of the 135 managers surveyed by Lloyds TSB UK Private Banking said they planned to increase their shareholdings in the coming months, and revealed that they had backed their beliefs with, on average, £71,000 of their own money.
Then, this week, more managers jumped off the fence.
Max King of Investec Asset Management came out and said: “We firmly believe that this has been the start of a new bull market.” His confidence stemmed from the fact that new equity issuance has been greeted with enthusiasm and share prices have responded positively to company results that were actually no better than expected.
Andrew Cole of Baring Asset Management insisted that buying opportunities in equity markets will persist, in spite of the recent rally. “Equities still look attractively valued, especially in the UK,” he said. He pointed to new share issues helping to bolster company balance sheets, the sharp drop in corporate bond spreads and the US interbank lending rate falling below 1 per cent.
Nigel Cuming of Collins Stewart said the “diffusion of positive indicators” and the receding deflationary threat make equities a favoured holding. “Our analysis of returns through periods of low to high inflation suggest that equities and commodities are likely to provide the best returns,” he argued.
Trevor Greetham, manager of Fidelity’s Multi-Asset Strategic Fund, said he now had the confidence to increase his equity weighting. “This [rally] is supported by a broad improvement in macro-economic data... an ideal backdrop for equities.”
But just how brave have these fund managers been? You may be surprised to learn that hundreds have been jumping into the markets with the investment equivalent of an auxiliary parachute strapped firmly to their portfolios: capital-protected structured products.
Research carried out using Financial Express Analytics reveals that, on average, UK retail funds now put 16.2 per cent of investors’ money into these protected holdings, as a hedge against market falls.
Investec’s Capital Accumulator fund is 19.2 per cent invested in structured products, for all the bullishness of its equity strategists. Barings’ Japan Growth fund holds 11.3 per cent of investors’ money in these products, in spite of all the equity buying opportunities. Credit Suisse’s Multi-Manager Multi-Asset fund chooses not to put all its faith in managers, with 7.8 per cent in structured investments. And it’s not the only one: similar funds from Thesis, Baring, Aberdeen and Scottish Widows Investment Partnership hold between 29 and 3 per cent in protected products.
What’s wrong with that? Nothing – apart from making all that bullishness seem a little disingenuous. Structured products can be an effective tactical holding. They do carry counterparty risk, if the institutions providing the capital guarantees default – but these counterparties are now routinely disclosed and issuers such as Morgan Stanley and BNP Paribas use government bonds, rather than investment banks, to back their plans. They do often limit the capital protection they give against large market falls – but the issuer Keydata points out that the FTSE 100 index in its history has never breached a 50 per cent downside protection barrier.
What is slightly galling, however, is paying an apparently bullish fund manager 1.5 per cent a year to hold protected products that you could buy yourself with no management charge. You don’t need a rucksack-clutching genius to tell you how to pull a ripcord.
matthew.vincent@ft.com
