Philip Parker from Altair Asset Management’s bold decision to liquidate his Australian shares funds and return the money to investors is highly contrarian. But his view that not all is well on the ASX is not.
While none have so far followed his lead in publicly quitting the market, many in Australia’s professional investment community appear to be quietly preparing for a downturn.
According to the JPMorgan Fund Manager Radar, which assesses the public disclosures of major fund managers to deduce common themes, average cash holdings surged to 370 basis points in April, overtaking consumer discretionary stocks as the largest active position held by fund managers across any ASX sector.
This follows several months of increasing cash allocations.
“We do see the appeal [of cash] in a market where opportunities look increasingly constrained due to extended valuations (healthcare, industrials), structural concerns (banks, resources, retail) and style/franking limitations (REITS),” wrote JPMorgan equity strategist Jason Steed, adding he believed cash allocations could rise further.
Mr Parker, a 30-year veteran of funds management, said he was cashing out and returning “hundreds of millions” in client money because he believed the overheated east-coast property market, a Chinese debt bubble and overvalued equity markets would combine to spell “calamity” for Australian equity investors.
“We think that there is too much risk in this market at the moment, we think it’s crazy,” he said. “Giving up management and performance fees and handing back cash from investments managed by us is a seminal decision, however, preserving clients’ assets is what all fund managers should always put before their own interests.”
Veteran fund manager Geoff Wilson, of Wilson’s Asset Management, didn’t quibble with Mr Parker’s assessment that the market was heading for some kind of downturn.
On the ASX – which has suffered a bad month, with the S&P/ASX 200 down more than 4 per cent and the big four banks on track for the worst May in 44 years – Wilson said: “It’s going to be a tough period. And that’s with the backdrop of the biggest global market in the very mature stages of a bull market,” he added, referring to Wall Street’s record-breaking run.
Bennelong Australian Equity Partners’ investment director Julian Beaumont was more sanguine, saying while the increasing allocation to cash holdings shows concern is building among fund managers, the level of systemic risk is being overstated.
“The risks aren’t that bad,” he said. “We’ve always had these risks. [Mr Parker] talks to getting out of equities from the point of view that property looks over-bought. But what’s the real relevance of that? A company like Woolworths, or CSL, or Telstra, isn’t reliant on the property market. You should still be able to find opportunities.
“Since the GFC, the worse the economy has looked, the more quantitative easing was required, the more the market has gone up … it’s not always the case that stockmarket returns will correlate with the economic picture.
“We do believe there are some real risks in a large part of the economy, and we’re positioning to avoid them.”
But both fund managers, assessments of risk aside, believed a falling market was no reason to give up on making returns for their investors.
BAEP is favouring sectors that are growing defensively, such as healthcare or everyday consumer products, plus Australian companies whose products are doing well overseas.
As for May’s underperformance, “it’s the top end that’s really suffered”, Mr Beaumont said, with the ASX 20 by far the worst performer.
“We’re certainly not throwing our hands up. We’re actually finding some good opportunities. In fact, valuations look quite attractive in certain parts of the market, especially outside the large caps.”
Mr Wilson, whose main large-cap equity fund is holding 30 per cent cash, believed even if things did worsen as drastically as Mr Parker expected, any downturn would provide an “exciting” opportunity to make some serious money.
“People deciding to get their money back, well, that’s their choice. But as a professional fund manager, everyone at Wilson spends all day trying to make money. That’s the case in cheap markets and in expensive markets.”
Mr Wilson added it was his belief that times when equities looked stretched were the best for fund managers to raise money. That’s because a crash, when it comes, offers fantastic opportunities to buy companies trading at steep discounts.
“Significant market adjustments – whether it’s the 1987 crash, the bursting of the tech bubble in 2000 or the global financial crisis – they create phenomenal opportunities for astute investors.
“Those three events were to me once-in-a-lifetime events where we could buy companies at, say, 50 per cent discounts to their cash backing.”
Anyway, he added, if you’re going to sell out, knowing when to do so is a fraught business.
“The thing is, you can never pick the top or the bottom of the market,” he said, before wryly noting the market’s tendency to confound expectations. “The fact that everyone’s negative means it’ll probably keep going up in the short term.”