Analysis: Cautious investors on top at half time

By Jeremy Gaunt, European Investment Correspondent

LONDON (BestGrowthStock) – The investment winners at half time, 2010, are those who have played catenaccio — on the defensive, seeking protection from risk — and there is little to suggest that this style will change much in the second half.

Volatility, the predominant characteristic of the first six months of the year, may calm down a bit and emerging markets look set to pick up their role as market and economic drivers again.

But there are new threats on the horizon, particularly from debt-ridden governments intent on cutting spending, that suggest what has worked so far may do so again.

Performance tables tell the tale.

Snuggled near the top of Thomson Reuters fund tracker Lipper’s top equity performers, for example, is the RBC Global Precious Metals Fund, returning around 11.5 percent year-to-date.

That compares with a loss of around 3.5 percent for equity funds as a whole.

But the RBC fund is only an equity fund in name. The equities it buys are linked to metals, particularly gold, which has gained around 13 percent this year, boosted by risk-averse investors fearing fiscal deficits, slow economic growth and government creation of a flood of liquidity to combat recession.

“If you are printing money around the world, that tends to be positive for the price of gold,” said Brahm Spilfogel, co-manager of the fund, in Toronto.

Moving over to balanced funds — those that invest in a mix of assets — it is a similar story. The ones that have outperformed tend to have been cautious in their choices.

Legg Mason’s Multi-Manager Balanced Fund, for example, is near the top of Lipper’s balanced fund performance table with a return year-to-date of 1.34 percent versus a loss of 2.7 percent on aggregate for balanced funds.

The fund, however, had 52 percent of its assets in bonds versus 45 percent for equities at of the beginning of May, Lipper’s latest data allocation data.

So the message for the first six months of the year appears to have been that outperformance comes with a healthy appetite for assets that do well when people are nervous.


Looking ahead to the second half, not much is likely to change unless the factors causing the first half’s risk-aversion are fixed.

The U.S. Federal Reserve’s comments this week tended to be more cautious about the U.S. economy and while the debate is on about whether there is a double-dip recession on the horizon, economic data for the industrial world, at least, is suggesting a slowing in recovery.

And when it comes to the deficits and other fiscal issues facing leading economies, there is growing concern that the needed medicine may have unpleasant side effects.

Attempts by governments such as those in Britain and Germany to cut their fiscal debt have been applauded in theory by markets. But cutting spending also threatens the prospects for recovering growth.

Looking at Britain, for example, Michael Dicks, chief economist at Barclays Wealth, reckons there is a danger that the recent deficit-cutting budget will hurt short-term growth more than the government estimates and that the longer-term rebound could be less.

He notes that fiscal multipliers used by the UK government — how much each 1 percent of GDP raised from tax rises and spending cuts hits overall GDP — are lower than those generally used by economists.

In a similar vein, U.S. fund firm JPMorgan Asset Management points to a dilemma of government’s having to act but doing so at an inauspicious time.

Noting that the size of public debt and deficits have become unsustainable in leading economies, it says in a mid-year outlook:

“To stabilize debt/GDP in much of the OECD requires a sizeable fiscal tightening that could threaten recovery. This is difficult and controversial at a time when global growth indicators are rolling over.”

Nothing in these views points to investors abandoning the caution they have embraced during the first half.


That said, there are some signs that the second half could be a bit less volatile for riskier assets than the first.

For one thing, the global stock market correction that began in mid-April — a more than 17 percent dive from high to low on the MSCI all-country world index — has steadied if not clearly reverse.

Some investors are talking about finding value in stocks and fund flows show appetite for emerging markets — the one bright spot in the world economy — rising again after a dip.

Median forecasts from over 300 strategists surveyed by Reuters showed a much better half ahead, but with an emphasis on emerging rather than developed markets.

With current correlations between equities and other riskier assets such as high yielding currencies being high, this may have wider implications beyond stock markets.

But the overall climate suggests that while the first half’s wilder volatility may ease, it will be a long way from smooth.

Consider the thoughts of one of those who has made the best of the past six months:

“The gold price in this environment will continue to go sideways to higher,” said RBC’s Spilfogel, suggesting that the worst he sees for his outperforming asset it to maintain what it has already gained.

Stock Market Today

(Additional reporting by Joel Dimmock; Editing by Toby Chopra)

Analysis: Cautious investors on top at half time