So much for the January effect. Last month played host to the first prolonged period of falling markets which the Australian bourse has seen since 2002.
I’ve got no idea whether the recovery underway at presstime will have collapsed by the time you read this. My name might have to be Glenn Stevens to know that, or perhaps Alvin Wilkinson, the founder of Pengana’s Global Volatility Fund and apparently the only person in the world outside the Federal Reserve boardroom who foresaw the 75 bps rate cut.
But regardless of what the ASX does in the next few weeks, my prediction is that the fact of the market turmoil itself will mean Australian equities managers get a reduced slice of the asset allocation pie in 2008.
The evidence is already there, of course, in the stories of super funds letting inflows go through to the keeper (cash) or in multimanagers radically redrawing their asset allocation plans. Van Eyk’s new strategic tilts in particular are a text book example of ‘new paradigm’ thinking.
Head of strategic research, Nigel Wilkin-Smith, explained the move was prompted by the change in economic conditions from 20 years of “falling inflation and interest rates, rising profit shares and uninterrupted economic growth” to a ‘now’ of rising inflation and volatility in global share markets. So it was down with the old – Australian equities, listed property trusts, international equities and fixed interest – and up with the ‘new’.
Van Eyk’s legion of financial adviser followers will get model portfolios loaded up with alpha-generating absolute return strategies such as fixed income macro, funds-of-hedge-funds and global macro; inflation hedges in the form of real assets such as direct property, commodities and gold; and beta-uppers including emerging markets, small caps and (that word again) cash.
As the carcasses of the overleveraged continue to pile up, it would seem choppy markets will be around for a while – an environment in which Alternative Investment Managers Association chair Kim Ivey acknowledges his members will need to “step up” and prove they’re a better bet than concentrated long-only shops.
Although he rightly counsels investors not to judge hedge funds on January alone. “It’s impossible for any manager to pick an exact inflection point…I’d be waiting for the March numbers to see who’s handled the volatility best.” I’ve a sneaking feeling that shorting a few of the listed Australian equity managers may also help their cause.