TimesOnline: Funds set to plunge £76bn cash into world markets

Funds set to plunge £76bn cash into world markets

By Patrick Hosking, Investment Editor

MORE than $140 billion (£76 billion) is expected to be pumped into equities over the next few months if the world’s fund managers dip into their hefty cash piles to reduce them to neutral levels.

Fund managers currently hold an average of 4.6 per cent of their assets in cash, a full percentage point higher than what is seen as the neutral level of 3.6 per cent, according to Merrill Lynch, the investment bank.

With fund managers gaining confidence in the wake of the US presidential elections and bonds widely seen as too expensive, the main beneficiary could be equities, Merrill said.

In its monthly fund manager survey, published yesterday, the banks said fund managers were under increased pressure from customers to put their cash piles to work.

Cash levels in November grew to their third highest this year. Although by historic standards they remain low, there is far more pressure today for fund managers to invest the money in productive assets because interest rates are so low. American fund managers leaving assets in cash — typically ultra-safe money market instruments — earn interest of just 1.5 per cent, meaning the principal shrinks after adjusting for inflation.

Of the $14 trillion invested worldwide by mutual funds alone, a 1 per cent shift from cash to equities would mean a $140 billion boost to world share markets. Including pension funds, the impact would be greater still.

The survey covered 302 fund managers with assets of $931 billion of assets.

David Bowers, chief investment strategist, said: “With bonds widely perceived to be overvalued, investors may turn to equities in the short term.”

The survey — the first since the US election — found that fund managers were now looking to take more risk in the short term, although there was still great uncertainty for next year.

A net 8 per cent of fund managers were now reporting a lower than normal appetite for risk, compared with 16 per cent in October. They were also more confident about company profits.

Bonds were being widely shunned, Merrill said, with 66 per cent of fund managers believing they were overvalued, compared with just 3 per cent who thought they were undervalued.

By contrast, just 14 per cent thought equities were over-valued, compared with 24 per cent who said they were undervalued.

Telecoms, as well as energy, were most in demand by equity investors, while autos, retail and media were most disliked.

The survey painted a mixed picture for UK fund managers. A net 79 per cent said UK fundamentals were deteriorating, yet a net 22 per cent also thought UK shares were cheap.

Merrill identified a marked change in UK interest rate expectations in recent months. The net percentage expecting another rise in base rates has fallen from 82 per cent in August 43 per cent this month.

The move away from cash already appears under way in Britain, with the proportion of managers claiming to be overweight in cash falling from 39 per cent in October to 14 per cent.

In the UK, insurance, raw materials, telecoms and media were the most popular equity sectors. Fund managers were most underweight in consumer staples, technology and drugs.