It is a good time for fund managers who have relatively high levels of cash in their portfolios, but not such a good time for those who are heavily invested in equities. Because the value of equities has dropped sharply while cash has held its value, the performance of funds with high cash holdings will be stronger, at least for the present. But even more important for fund managers with high cash holdings is the flexibility they now have to go into the equity market and hunt for bargains. Friends Provident had on average about 10 per cent of its funds in cash at the end of September, as against a market average of 6.4 per cent. Other funds with high cash levels, according to Mercer Actuaries and Consultants, included Standard Life with 16.6 per cent, Bank of Ireland Asset Management with 12.6 per cent and Montgomery Oppenheim with 10.4 per cent. Fund managers with good cash levels can now go into the market and buy shares at the new lower levels. Friends Provident fund manager, Mr Phramit Ghose said yesterday: "We have been bargain-hunting. AIB for example is every bit as good today as it was a week ago but I can now pick the shares up for 530p, compared with 595p a week ago. It is a good time for those with cash to spend". It is now a question of "whether the latest movements on international equity markets are a five-day wonder or, as is more likely, the start of a period of very volatile trading", he said. Fund managers manage company pension funds and other investments such as unit funds on behalf of individual investors. A fund manager's portfolio will generally comprise equities - Irish and foreign shares - fixed interest investments such as government bonds, property and cash. Each fund will hold these assets in different proportions depending on the fund managers view of how the various market sectors are likely to perform.
In recent months some fund managers sold equities and moved a bigger than usual proportion of their funds into cash or property on the view that equity markets were overvalued and a correction was imminent. Fund managers who moved too early missed out on the rise in equity markets, which have moved strongly ahead until recent weeks, depressing their overall performance. But those managers who became cautious on equities in recent weeks are now in a relatively strong position.
At Irish Life, investment managers have been diverting funds out of equities and into property since the end of last year, according to investment manager Mr Frank O'Brien. "Property is an equally defensive asset on a one to two year view and it has the potential to outperform cash because of the strength of the Irish economy. While Irish Life had on average only 1.7 per cent of its funds in cash it has an average of 8.7 per cent in property assets.
Irish Life was broadly in line with the market average on the investment of the balance of its funds with 33.4 per cent (market average 33.7 per cent) in Irish equities, 38 per cent (38.2 per cent) in overseas equities, 15.6 per cent (15.4 per cent) in Irish gilts and 2.6 per cent (2.8 per cent) in overseas gilts. "It is important to remember that even with this correction equities are still showing dramatically good gains so far this year. When market gains plus currency gains are taken into account, the US market has produced gains of 35 per cent for Irish investors, the FTSE 20 per cent, Germany 30 per cent and Milan 45 per cent. Where investors have taken a bath is Hong Kong where the fall has been 24 per cent and Japan down 8 per cent in pound terms," Mr O'Brien said.
Fund managers are now trying to assess whether the latest gyrations are the start of a bear market like in the 1970s when there were sharp falls in share values over a one to two year period or whether it is a correction.
"It feels more like a correction," Mr O'Brien said. "Normally, rising inflation is associated with a prolonged bear market and that is not there now. And the slowdown in the Pacific economies should depress demand and therefore inflation," he said.
But how far that correction will go is now the primary consideration. Extremely nervous markets are waiting to see to what extent big US and other funds will come in to buy in the dips.
