European and Japanese markets have been among the favoured asset allocation plays for offshore globa...
European and Japanese markets have been among the favoured asset allocation plays for offshore global funds in the Forsyth Partners' universe. At the end of the first quarter, these two and the emerging markets benefited at the expense of US weightings.
The average manager has raised his cash weighting slightly while trimming exposure to the major markets.
Peter Toogood, head of research at Forsyth Partners, commented: "While many managers recognise that the US market will probably continue to be the driver, they see prospects for the European markets improving."
The MSCI World Index has a 50.2% exposure to the US but in the Forsyth Global Equity sector the weightings range from 50% by Mercury ST, Global Equity, down to a mere 7.4% by GAM Universal. During February the sector's average exposure fell from 38.2% to 37.9%.
In Japan, the story remains centred around 'new Japan', an area where the domestic investor is clearly present, but Toogood noted that foreign managers are still buying 'smokestack' Japan.
The sector average Japan weighting now stands at 14.5% for the end of February, a level above the MSCI index weighting of 13.3%
The asset allocation analysis, contained in the latest monthly update of Fund Analysis & Ratings, shows that in Europe the focus has been on the smaller and mid-cap companies.
Toogood noted that in emerging markets, opportunities have been available on a selective basis and fund managers have needed to be nimble to reap the rewards.
While hopes are high for resurgence in Latin America, the average manager is pinning hopes on continuing progress in eastern European economies, and even spreading out as far as Russia.
In the US, Forsyth noted that a lot of managers have decided that the best approach has been a blend of managers following a variety of styles.
The headlines continue to focus on technology, but it is the swinging sentiments from value to growth and back again that have been a key feature in the first quarter.
In the fourth quarter of 1999, Forsyth Partners was noting the narrowness of the market and how difficult it was for groups to manage money in this environment.
The polarisation of the market was at an extreme and the selection of an appropriate mutual fund, said Forsyth, "has never been more perplexing".
The inevitable swing away from growth was reflected in some fund managers' asset allocation even before the turn of the year.
But it was not until the end of the first quarter that this strategy really paid off. The dramatic outperformance of the technology, media and telecommunications sector left many fund managers confused and desperate to participate in the recent rally.
This meant that they were also adding to the divergence in sector performances by selling the old economy stocks in favour of the new.
This exaggerated the overall effect and unnerved many seasoned commentators who were arguing that the move must ultimately be unsustainable.
Despite the correction, the jury is still out, but what is painfully clear is that the majority of the investing public has decided to favour the new economy model and this is what is driving stock prices.
Given a central expectation for stronger growth in 2000, and the traditional first quarter rally in cyclicals, it was entirely appropriate for managers to consider a more blended investment strategy, according to Toogood.
What is clearly up for debate, said Toogood, is the sustainability of any cyclical rally.
If global growth does accelerate and other sectors of the market can show relative and sustainable earnings strength, tech may falter.
If global growth disappoints, or central banks are overtly aggressive, the 'tech bubble' will continue as it is one of the few areas capable of delivering accelerating earnings momentum, Toogood predicted.
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