LONDON Aug 9 The world's biggest state-backed
funds are joining the "Great Rotation" portfolio switch out of
bonds into equities, a move that risks crowding the trade and
lessening the allure.
The shift into higher-return equities out of low-yielding
bonds is one of the top investment themes of 2013, driven mainly
by U.S. private pension funds and retail investors.
But recent plans by Japan's $80 billion pension fund to
increase equity weightings at the expense of bonds and Norway's
move to boost stocks and cut some bonds highlight a greater
involvement from the world's biggest and influential investors.
The sheer size of these funds means even a small switch in
their asset allocation could easily elevate prices, raise
valuations and close the value gap equities offer over bonds.
"It's now driven by almost all types of investors. If you
take a rational decision and try not to time the market...
equities are still the most attractive asset class," said Dirk
Wiedmann, head of investments at Rothschild Wealth Management.
"We're all being forced to take equity risks. We do it
because it's the most attractive of not so attractive options.
Do I feel very comfortable? The answer is no... The fundamental
case for equities is weakening."
According to most recent estimates by Thomson Reuters
Lipper, equity funds and Exchange-Traded Funds had net inflows
of $60 billion in the past four months, which represents around
0.8 percent of total assets.
Bond funds and ETFs had net outflows of $22 billion, which
represents around 0.5 percent of total assets. In June alone net
outflows from this group were $78 billion, or 1.7 percent of
The pension fund for Japan's civil servants is considering
changing its strategy to allocate more of its $80 billion to
stocks and less into domestic government bonds.
Its current asset mix may almost guarantee a capital loss -
it invests nearly 80 percent in Japanese Government Bonds and
just 5 percent in domestic stocks.
The move follows the $1.2 trillion Government Pension
Investment Fund, which raised its Japanese stock allocation in
June to 12 percent of its portfolio from 11 percent and lowered
JGB holdings to 60 percent from 67.
Norway's $760 billion sovereign wealth fund has increased
equity holdings to 63.4 percent of its portfolio from 62.4
percent three months ago and cut its government bonds weighting,
especially in Britain.
"It is less a reflection of our enthusiasm for equity
markets and more a reflection of our lack of enthusiasm for bond
markets," Yngve Slyngstad, chief executive of the Norwegian SWF,
told reporters on Friday.
But just as long-term investors join the equity rally,
reasons for aggressively buying equities may be becoming less
Bank of America Merrill Lynch says the S&P 500 index
has been in a bull market for more than 50 months since March 9,
2009, nearing its historical average since 1932 of 57 months.
Valuations are starting to be unappealing. The Shiller price
earnings ratio, which measures equity prices relative to average
earnings over the past 10 years, stands at 24, above the
long-term average of 16.
"Valuation on balance is okay but not a screaming buy,"
Rothschild is hedging almost half of its equity positions
"On balance liquidity is the only convincing reason to buy."
(Additional reporting by Gwladys Fouche and Joachim Dagenborg
in Oslo and Joel Dimmock in London; Editing by Ruth Pitchford)