Finding shelter in a storm
NEW YORK – If you’re feeling a bit wary about the stock market, you’re in good company. A recent survey of mutual fund managers shows many professional investors are losing their appetite for risk, too.
Some fund managers are so alarmed about rising inflation, oil prices and the prospect of slower global growth that they’ve reduced their exposure to equities and substantially raised their cash holdings, according to a survey conducted by Merrill Lynch this month.
Of the 280 fund managers who participated in the monthly survey, 86 percent think inflation will rise over the next year, and two-thirds believe interest rates will go up by August. Less than 10 percent expect the world economy to strengthen in 2004; only 26 percent expect improvements in corporate profits, down from 47 percent last month.
Reflecting the interest rate concerns, the number of managers saying they were overweight in technology and banking stocks fell dramatically during the month. More than a quarter said they were overweight in cash, with average cash holdings at 4.5 percent, up from 3.8 percent in April.
“Isn’t it interesting what a little interest rate fear will do?” said Janna Sampson, co-manager of the AmSouth Select Equity Fund and director of Portfolio Management at Oakbrook Investments. “It’s been ugly this month. There’s no doubt people are scared.”
That interest rates are on the way up is no surprise in a growing economy, Sampson said. But the soaring price of oil has been a worrisome factor. Higher energy costs are essentially a tax on equities, she said, which creates “kind of a double whammy,” when coupled with rising rates. Analysts are growing more concerned that this will eat into corporate profits, making it more difficult for companies to meet earnings expectations in the months ahead.
The bearish sentiments are supported by fund flows, which show asset levels are down at aggressive growth funds, said Carl Wittnebert, director of research at TrimTabs Investment Research Inc.
Still, he noted, flows remain steady into equity income funds, which hold more stable, dividend-paying stocks.
Small investors should take heed, said Gary Kaltbaum, president of Kaltbaum & Associates, a money management firm in Orlando, Fla. He’s recommended his clients follow the lead of larger investors by focusing on more stable issues, building cash reserves and, most importantly, not “buying on margin.”
“You should have raised the bar on the type of things you’re buying,” Kaltbaum said. “You should own more defensive issues, like the Procter & Gambles of the world, that will not be exposed as much as the high-flying names that could get bludgeoned in a market like this.”
If safety is a concern, you might consider a fund with a higher percentage of consumer staples. You can also gauge the amount of risk a manager has taken on by checking a portfolio’s “beta” – a figure that measures the degree to which the fund fluctuates against the total market.