What do advisers know that institutional investors don't?

New surveys reveal rising optimism among financial advisers while large money managers circle the wagons

Oct 30, 2012 @ 2:21 pm

By Jeff Benjamin

Economic confidence, sentiment
+ Zoom
Plenty of bears out there

Institutional investor confidence is now officially in the tank, according to a report out today. Confidence among financial advisers, however, ticked up slightly in October.

The Global Investor Confidence Index in October, as calculated by State Street Corp.'s investment research and trading unit, has hit it lowest point since the index was created in 1998. The current reading is also 1.5 points below the previous low set in October 2008 as the financial crisis was just beginning.

“Institutional investors continue to display a pronounced, almost secular desire to reallocate away from equities and toward fixed income and cash securities, and this desire has accelerated through the recent market correction,” said Kenneth Froot, a Harvard University professor who helped develop the confidence index.

According to the report, the large drop in global investor confidence, down 6.7 points from last month to 80.6, stemmed from a steep drop in European sentiment, with the European Investor Confidence Index falling 10.3 points to 94.9 in October.

Among North American investors, confidence was down 2.7 points to 79. Asian investor confidence fell 2.9 points to 84.5.

“In 2008, the last time that global investor confidence was in this range, the regional pattern was somewhat different,” said Paul O'Connell, senior researcher at State Street Associates.

He added that in 2008, North American institutional investor confidence was about 6 points lower, but Asian investor confidence was 10 points higher.

“This shift is reflective of the changed investment outlook, with improved U.S. prospects offset by slowing growth in the Asian region. The net effect is that institutional investors have little appetite for risky assets.”

Unlike some other confidence and sentiment indexes, the State Street model measures investor confidence, or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors, including mutual fund managers.

The index assigns a precise meaning to changes in investor risk appetite. For example, the greater the percentage allocation to equities, the higher the risk appetite or confidence. A measurement of 100 is considered neutral.

Even though the index is described as an institutional investor measurement, Mr. O'Connell explained that the data includes both direct institutional investments and investments made in mutual funds by retail investors.

“The central theme is that there seems to be a re-allocation away from equities and toward fixed-income instruments,” he said. “It's a conundrum, especially when you consider where bonds are today, but we have had a pretty good rally for stocks.”

In terms of the index reflecting bearish sentiment, Mr. O'Connell pointed out that “We know that, often when indexes reach highs or lows, it is an indication that things are about to reverse.”

The State Street report follows Monday's Advisor Confidence Index from Rydex AdvisorBenchmarking, which showed confidence among financial advisers up slightly from September.

With a confidence level measured at 96, advisers are still a few points from the neutral mark of 100. But the October report does reverse a three-month slide in confidence.

The latest measurement represents a slight uptick from 95 in September, but the index is still down from its recent high of 105 in June. The index's high for the year was 111 in April.

The monthly index, which is modeled after the Consumer Confidence Index, gauges the perspectives and sentiment of 150 financial advisers across four broad investment categories including current economic outlook, six-month economic outlook, 12-month economic outlook and stock market outlook.

Of the four categories, only the 12-month economic outlook registered a negative score, suggesting lingering uncertainty about what lies ahead after the presidential election and the challenges related to the year-end fiscal cliff.

“The economy will trudge along, swimming upstream against fiscal austerity and the need for some modest tax increases,” said survey respondent Gregory Horn, an adviser at Persimmon Capital Management.

The timing of the surveys make exact comparisons with the stock market difficult. In general, advisers have become more confident in the S&P 500 index over the past four weeks while that benchmark has actually declined by about 2%.

Of the 10 four-week Advisor Confidence Index cycles through the third week of each month so far this year, financial adviser confidence was measured as climbing five times, with the biggest jumps coming in January, February, April and June.

During those four months, the S&P 500 gained 4.2% in January and 3.7% in February but fell by 1% in April and was flat in the June period.

The biggest decline in adviser confidence this year came in May with a drop of 13 points, while the S&P fell by 5.9%.

The S&P has gained 12.3% from the start of the year.

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