Living in Stocks, Dying in Bonds
October 25, 2012
BOSTON - Determining which asset classes and markets are currently attracting the most investor attention can be a daunting task for asset managers. Thanks to the folks at research shop Strategic Insight, they don't have to do it themselves.
At the recent FundForum USA Thought Leadership Summit, Avi Nachmany, SI's head of research, outlined a few notable product trends that fund firms can take back to the lab and to their board of directors.
Nachmany noted that investors are currently holding $10 trillion in cash earning zero returns. "It's important to remember that this is not liquidity to the stock market. This is a semi-permanent state of anxiety that we currently live in the U.S. and globally," he said. "There's an insatiable desire for income investing. If you can somehow offer a solution, you can benefit from that."
Investors' seemingly insatiable demand for bond funds at the tail end of 30-plus years of falling interest rates mean that bond managers will have to come up with innovative ways to feed their investors' appetites, according to Nachmany. "We will have an opportunity to grow our bond fund businesses today, tomorrow and next week. But thinking out five to seven years, it's an enormous task," he said.
For starters, Nachmany said current bond fund managers need to think about increasing their skill sets to include "flexibility" and "duration" in order to capture more market share in the U.S.
"You need to have a mature and earnest discussion with the board of directors to allow you to have that flexibility. It takes time to get this through and 2013 and 2014 are the years that that discussion needs to take place," he cautioned.
He also asked audience members if they check their smart phones in the morning before they brush their teeth. When some raised their hands, Nachmany offered that they do it because, like his daughter, some just can't wait for the good, or bad, news coming their way. "Somehow we have developed a consciousness that maybe something terrible happened and we need to know that right now. This is why we all buy bonds and, like me, keep our money in the bank and figure out what the heck to do," he said.
Nachmany said 70% of U.S. equity mutual funds are in qualified tax-advantaged retirement accounts. "There's plenty of room for the stock market and our investments to go up. Money that you may need in seven years and out should be 100% in stocks, especially today. You're going to live in stocks and die in bonds."
"Our lives have become too complicated and by the time this presentation has finished, collectively we will receive 50,000 emails. We need to outsource the complexity of our lives anywhere we can, and one place where we can do that is in global asset allocation balanced investing," he said.
Nachmany said his firm has observed a spike in the use of exchange-traded funds partly as a hedging strategy by institutional investors. "In September, ETFs got more than $36 billion, a lot of that from institutions. It's the best month for ETF flows in four years since Q4 2008," he said. And while investors are comfortable with passive ETFs, Nachmany offered that the active ETFs have yet to pick up steam. "So far, we're not even in the beginning of the baseball game," he said.