Funds shift into stocks, but long-term returns may be better elsewhere

A recent survey by Reuters has found that fund managers recently shifted more funds into stocks.

Fund Managers Favor Stocks Over Bonds
U.S. fund managers, apparently worried about a decline in bond prices as rates rise, shifted money to stocks from bonds during February, according to a new Reuters asset allocation poll. The allocation changes in the latest monthly survey put the mix of stocks and bonds back to near where it was in November, when U.S. stocks rallied after the election. The poll showed a 67.1 percent weighting in equities in February, up from 54.5 percent in January. Bonds fell to 27.6 percent in February from 40.5 percent the month before...

Asked what allocation shifts are anticipated over the next three months, the managers anticipate a smaller underweight in bonds and a smaller overweighting in stocks...

Reuters mentions that Anthony Chan, managing director and senior economist at JP Morgan Asset Management, expects US equities to provide a return of only about 5 percent this year.

John Hussman of the Hussman Funds takes a longer term look at returns in "The Likely Range of Market Returns in the Coming Decade". By looking at the current market valuation, he concludes that the likely return for US equities "is in the 2-3% range based on average and median scenarios, with outside possibilities as low as -3% in the very bearish case and still less than 8% in the very bullish case".

Last week's edition of The Edge Singapore carried an interview with Klaus Martini's, chief investment officer for Deutsche Bank's private wealth management. According to Martini, a balanced portfolio consisting of an equal proportion of bonds and equities will probably yield a return of 2-3 percent after taxes and inflation going forward.

"Old mainstream investing is offering less and less returns because everybody is already in there," said Martini. "Therefore, you have to find something that is not mainstream."

The alternative investment recommended by Martini is commodities, especially soft commodities like meat and agricultural crops. Martini thinks China's growth will drive demand for these commodities. To gain exposure to rising prices of soft commodities, Martini has developed an equity portfolio of food producers, especially Asian food producers.

For equities in general, Martini thinks that they will do better than bonds in 2005, which will struggle as interest rates rise. He thinks that European and Asian equity markets look most attractive in terms of valuation, while US equities look relatively expensive.

Martini also thinks that Asian currencies will appreciate against the US dollar this year, especially if China revalues its currency.

However, Martini thinks that real estate in developed countries is "really expensive", especially given the rising interest-rate environment.