Institutional Investment Managers Grow Cautious as Fears of Inflation Rise

Location: Chicago
Author: John O’Connell
Date: Monday, April 18, 2011

“Global events during the first quarter of 2011 have given our managers a lot to digest in a very short amount of time”

Approximately 70 percent of managers believe that the risk of inflation will increase over the next six months, and a majority of managers (62 percent) expect market volatility, as measured by the VIX Index, to increase over the next six months. Responses on both questions were at their highest points since the Northern Trust survey began in the third quarter of 2008.

This quarter, managers were also asked for their views on oil prices. More than half of those surveyed believe that oil prices will continue to rise over the next six months, with 90 percent of managers expressing the view that increased oil prices will negatively impact economic growth. Twenty-six percent of the managers increased their portfolio exposure to commodities during the first quarter, a possible result of the increasing expectations that inflation is set to rise over the next six months.

“Global events during the first quarter of 2011 have given our managers a lot to digest in a very short amount of time,” said Chris Vella, Global Director of Research for Northern Trust Global Advisors (NTGA), the multi-manager investment arm of Northern Trust. “With renewed unrest in the Middle East, it makes sense that managers have become increasingly concerned about the impact that a spike in oil prices will have on economic growth. Likewise, as general concerns around inflationary pressures persist, we would expect some of our managers to increase their exposure to commodities as a means to hedging out some of that risk.”

Managers remain positive regarding U.S. market valuations. The majority of managers (58 percent) stated that the U.S. equity market, as measured by the S&P 500 Index, is undervalued. However, there was a decrease in the number of managers who believe that corporate earnings will increase over the next three months from 80 percent in the fourth quarter of 2010 to 69 percent during the first quarter of 2011.

Looking at Japan following the March 11 earthquake and tsunami, two-thirds of managers surveyed believe Japanese equities are undervalued. There was also an increase from previous quarters in the degree of perceived undervaluation, as 31 percent of managers see more than 10 percent upside in Japanese equities – a 12 percent rise from the previous quarter.

The survey of approximately 88 institutional managers was conducted by NTGA in mid-March. All respondents participate in NTGA's external manager platform and are utilized in investment products including mutual funds, separate accounts, emerging manager programs and other investment solutions.

Other major findings from the survey include:

·         36 percent of managers are more risk-averse compared to last quarter when just 20 percent expressed this view.

·         42 percent of managers think that home prices will decline over the next six months, an increase of 10 percentage points over the prior quarter.

·         Investment managers cited technology, energy, industrials, emerging markets, and healthcare as the top five most attractive market segments respectively.

·         The percentage of managers that believe emerging markets are undervalued rose slightly from 39 percent in the fourth quarter of 2010 to 43 percent during the first quarter of 2011.

·         Portfolio concentration levels remained largely unchanged for the quarter relative to the fourth quarter of 2010. Roughly 66 percent of managers stated that their portfolio concentrations were the same as last quarter, while 21 percent stated that their portfolios were more concentrated, down slightly from 24 percent last quarter. 13 percent of managers stated that their portfolios were less concentrated, a slight uptick from 11 percent last quarter.