Fund managers are scratching their heads over the withdrawal from the Australian equity market by small player Altair Asset Management.
Many point to the benefits of staying in the market, riding out the falls and the highs to achieve decent average returns over time.
Philip Parker, the chief investment officer at Altair, wrote to clients, explaining why he was getting out of the market and returning cash to investors.
“The main reason is, in my opinion, that there are just too many risks at present, and I cannot justify charging our clients fees when there are so many early warning lead indicators of clear and present danger in property and equity markets now,” he wrote.
“Lack of upside in our models of course leaves an active manager little alternatives but to hand back cash at such an overvalued and dangerous time in this cycle.”
However, other fund managers say no one can pick the top or bottom of the market and that any big fall brings opportunity.
They point out also that Altair is a tiny player in the Australian fund management industry.
Chris Brycki, the founder and CEO of automated investment adviser Stockspot, says such a play means getting both exit and entry points to the market correct.
“Very few people have been able to consistently do that well,” he told Business Insider.
“When investing, being right with your call but wrong with your timing is the same as being wrong.”
Brycki, who started out as hedge fund manager aged just 19, says fair value is an abstract concept, with stocks passing by on their way to becoming more cheap or more expensive.
“Sometimes markets can seem cheap or expensive for decades,” he says.
“Many people who were perma bears before the financial crisis felt vindicated when the market fell 40% in 2008-9 but then never reversed their call so are now behind by 300%.
“Rather than try and time the market, we give our clients broad access to diversifying investment, and periodically rebalance to reduce risk when markets overshoot.”
Geoff Wilson, who founded Wilson Asset Management in 1997, says no one can pick the top of a market.
“As a fund manager, it’s not whether you lose money when the market falls, it’s how much you make by taking the opportunities that present themselves when the market falls,” says Wilson.
Wilson’s funds are holding a lot of cash at the moment, a classic defensive position against volatility and good positioning to make investments if the market takes a big fall.
Wilson’s WAM Capital fund has $454.6 million in cash and fixed interest, or about 38% of the $1.18 billion portfolio, a 6 percentage point rise since March.
Other see the equities market overvalued at the moment.
Elizabeth Moran, director of education and research, at FIIG Securities, an Australian bond and fixed income specialist, says few fund managers close funds at their peak and make big decisions with broad repercussions.
“Phillip Parker’s announcement that Altair Funds Management has sold its shares and returned funds to investors was courageous,” she told Business Insider.
“We all know the risks are present and building but few make big calls and follow them through.
“His view reflects ours at FIIG, where we see many over-valued markets and think this is a time to take profits and consider rebalancing towards defensive assets, in preparation for the next big stress event.”
She says a big concern is China’s growing debt which, including state-owned enterprises, is 183% of GDP, very close to Greece at 189%.
“If China falters, the impact on Australian would be unprecedented, affecting many sectors,” she says.
Ric Spooner, chief market analyst at CMC markets, says Altair’s move is extreme.
“Being entirely out of risk assets like equities and property carries its own risk,” he says.
“If you are wrong and markets keep rising; your ability to buy back might be severely diminished.
“Investors always have a wall of worry to climb. The risk of calamity is ever present and it’s the main reason that risk assets like stocks and property earn higher returns over time.”
Expectations generally have fallen for returns from the market.
The ASX200 will end the month of May about 2% down, led by steep falls in the market cap of the big banks.
The federal government this month cut the investment mandate for the sovereign Future Fund by 0.5 of a percentage point. The government now sees the fund growing at 4% to 5% above inflation.
“Actuarial analysis indicates global investment market conditions may make it increasingly difficult for the Future Fund board of guardians to achieve current returns without taking on excessive risk,” said treasurer Scott Morrison.
Still, the fund has been returning an average 7.7% a year since 2006 when it was formed.
And superannuation funds have already hit double digit returns this financial year. To April, the median balanced option returned 10.0% with two months to go to the end of fiscal 2017, according to industry analysts SuperRatings.
“Economic indicators remain robust, although weaker inflation figures may be of some concern to investors as well as central banks,” says SuperRatings chairman Jeff Bresnahan.
“We have not seen the strong boost in confidence many have been hoping for, but neither have we seen any sign of a sustained pullback or dramatic loss of momentum.
“Despite the fact that significant risks remain, including in the housing market, the outlook for 2017 remains somewhat positive.”