Finding the right strategy for entering the market

At this juncture in the cycle, investors are largely positioning themselves in anticipation of an upturn in the markets. “Most of the discussions we have with our clients are about concentrated growth strategies,” says Michael Jones, head of European financial institutions at Janus Capital International. “Currently, there are two schools of thought; those who are investing in concentrated growth strategies to capture the upswing in markets they expect, and then another group of investors who are waiting for the sell off with a view to entering the market at a later date.” A recurrent theme is the comparison between US markets and opportunities in emerging Asia. “In terms of asset allocation, the received wisdom was that investors would move from cash back into mature equity markets, like the US,” explains Mr Jones. “However, many professional investors have gone straight to Asian and emerging market equities, which we consider high risk. The US market has a wealth of investment themes, is liquid and is more resilient than many other countries and, we think, will lead us out of recession. It has been a great source of innovation and entrepreneurship over many years – investors underestimate the power of the US economy to outperform at their peril.” Christian Gattiker, head of research at Bank Julius Baer in Zurich, would plump the other way, however, and expects muted returns from the US over the next few months. “As opposed to some stock indices in the emerging world that are in a structural bull market, we see US equities being caught in a structural bear market,” he says. “We lowered our 2009 year-end target in the S&P 500 to 950 (from 1000), which does not look too appealing in terms of upside, particularly given the price fluctuations that will continue be substantial over the next six months.” There are good arguments for both passive funds and active funds in this space. “The best way for clients to gain exposure to US markets is by a broad index fund that covers the market and diversifies away stock and sector specific risks,” says Mr Gattiker. “If clients want to invest in US stocks on their own, we recommend focusing on low beta, high dividend stocks, keeping a large cap tilt,” he explains. “But overall, growth style looks appealing for the US as well,” he adds. “A US equity fund should offer a broad diversification and at the same time have some style tilts. The US market is generally rich in growth stocks and therefore we think the ideal fund should reflect this. In terms of depth and breadth of the IT or energy sectors, the US market is quite unique and this should be reflected in a fund, to make most of the US for European investors.” Paul Mangus, director of equity strategies at Wells Fargo Wealth Management, similarly recommends both active and passive funds, taking care that the tilt of any active fund is well defined and that the manager stays true to it with little style drift. Wells Fargo is currently modestly overweight US equities and within that, overweight large caps. Investors outside the US will also be warned about the dollar risks. For example, Julius Baer currently hedges anything above 1.40 in the E/$ exchange rate on behalf of its clients.