QE2 has further prompted fund managers to embrace risky assets; but do low cash levels point to a correction?
The Fed’s second round of quantitative easing (QE2) confirmed for most investors that low rates are going to be around for a while. As a result, fund managers have continued to pile into riskier assets, according to a recent survey from Bank of America Merrill Lynch. This means there’s no time like the present to check external cash manager investments.
The good news from the survey is that 35 percent of investors see the global economy strengthening in 2011 vs. 15 percent a month earlier, BofA Merrill said. Also, 41 percent of respondents see corporate profits rising by 10 percent or more in the same period. This has given impetus to the rush.
However, according to the survey, investors could be rushing in at their own peril. That’s because the number of global investors’ overweight cash has hit a seven-year low as more of them focus on the near term. This is dangerously low and suggests investors are now vulnerable to event risk such as a worsening European sovereign debt crisis (Ireland this week and possibly Portugal and others in the coming weeks) or even a dollar rally.
The question for treasurers then is whether their external manager is part of that rush. The results “show a general feeling in the investment community that now is the time to take on more risk,” said Barbara Shegog, a director at Harrison Fiduciary in Boston. With that in mind, she added, treasurers need to stay on top of their external managers, “to insure that their risk profile in the investment portfolio is consistent with the goals and objectives of the corporation and not take on more risk to catch a possible positive blip in the market.”
Ms. Shegog noted that as little as five years ago, money market funds didn’t publish regular characteristics of the funds, which made due diligence almost impossible. But now funds are much more transparent so investors can and should ask questions (see related story here). Therefore, investors “need to do careful due diligence on their cash funds to understand the risks that are taken.”
Other key findings – and potential pitfalls – in the survey were that the number of investors expecting inflation to rise in the next 12 months has jumped to 48 percent vs. 27 percent in October. And nearly half of respondents believe global monetary policy has been “too stimulative.”
The events in Europe this week along with the brewing municipal bond crisis here in the US should serve as warnings to investors that despite the feelings of good cheer about the economy of late, there are plenty of issues that could still derail the economy – dragging portfolios along with it.