Posted on 4/30/2014 @ 10:24AM
http://www.forbes.com/sites/kenrapoza
Even though the U.S. economy slowed to a crawl in the first quarter, managers in charge of large endowment and foundation funds are in good spirits. Their favorite portfolio investments spots this year include emerging markets, and for hard assets — real estate. And they are more bullish about alternative and foreign investments than U.S. securities.
A first quarter survey of endowment and foundation managers conducted by industry consulting firm NEPC showed that 75% of respondents feel the economy is in better shape now than a year ago. The survey gives financial advisors a sense of investor sentiment in one of the most prized clientele segments for wealth management firms.
“Overall confidence is reflected in more than half of endowments and foundations polled saying the markets will show high single-digit returns and their strong conviction that equities, both U.S. and emerging markets, will be the top performers in the year ahead,” said Cathy Konicki, a partner at NEPC in Boston. The survey was conducted this month, so respondents were already aware of a slowdown in China, the Russia-Ukraine crisis, and a less-stunning S&P. U.S. equities in the S&P 500 rose around 1.3% in the first quarter, beating out emerging markets, the MSCI Europe and Japan.
According to NEPC survey of endowment and foundation investment trends, allocating to emerging markets and alternative investing now trump U.S. equities.
The U.S. economy expanded just 0.1% in the first quarter due to weaker than expected exports, the Commerce Department said on Wednesday. GDP growth, while still positive, is a stark contrast from the 2.6% gain in the fourth quarter.
Economists polled by Reuters expected growth to come in at 1.2%. Commerce blamed the slowdown on consumers hibernating this cold winter, and construction crews buying less material for outdoor projects as a result.
Big money endowments have lived through the cycle and it doesn’t phase them one bit.
One of the more interesting takeaways from the survey is the interest in emerging market equity. Emerging markets have been getting clobbered much of the year, thanks primarily to the continued round of lackluster economic news out of China, the preferred punching bag of financial pundits.
Year-to-date, the MSCI Emerging Markets Index is down 1.62%, while the MSCI China is down 9.39%.
Nevertheless, endowment and foundation money say emerging market equities will be one of the strongest performers of 2014. It tied for first with domestic equities when asked for this year’s top performing asset class, each earning 22% of the vote.
The poor man’s emerging markets, the so-called frontier markets, will an underweight. However, 42% of survey respondents said they are considering an allocation to frontier specialty funds in the future.
Allan Conway, head of emerging market equities at London-based investment bank Schroders told FORBES recently that investors should follow their lead and start buying emerging markets now. ”I’m expecting a big bounce later this year into next year,” he said.
While flow data does not suggest a shift in asset allocation, NEPC’s survey said there continues to be a migration of capital from traditional equity and fixed income strategies to non-traditional assets, including specialty funds and hedge funds, limited liability corporations, and private equity.
More importantly, only 4% of respondents said they’ll be putting more money to work in the U.S. stock market through traditional means. But 81% said they were planning to increase exposure to multi-strategy funds, credit-linked funds and specialty hedge funds.
Then there’s private equity, which continues to be the favorite “alternative investment” for endowments and foundations. Some 38% said they’ll be investing more in private equity this year, up from 32% last quarter.
Despite overall market confidence, 50% of respondents said that a slowdown in global growth was the single greatest risk to investment performance, down from 60% who said so in the fourth quarter.
For those who demand more dour news about the U.S. market at least, there is Marc Faber of the Gloom, Boom & Doom Report. He said on CNBC today that the Nasdaq is due for a “dramatic correction” this year, especially social media stocks like LinkedIn and Facebook. On the other hand, he likes emerging markets.
“U.S. investors have to now choose what to buy. I believe it is too late now to buy the U.S. stock market,” he said. ”I’m not ruling out a further bond rally…but in general I think that individual investors are excessively optimistic about their future returns.”
Kenneth Rapoza, Contributor
Posted on 4/30/2014 @ 10:24AM
http://www.forbes.com/sites/kenrapoza
