This is significantly more than the funds have held during more verdant investment periods, but is indicative of a lack of opportunities rather than worries that the bottom is about to fall out of the market.
Said Dan Kemp, Chief Investment Officer at EMEA Morningstar Investment Management: “We are not overwhelmed with good ideas at the moment.”
Part of the problem facing the firm is that a number of their bets have come off much more quickly than they had anticipated – for example, European energy stocks, leaving them with fewer options than they previously had.
According to Kemp, Emerging markets still look more attractive than most other markets, certainly when compared to the US, but it is increasingly important to become more granular in one’s allocations.
“Emerging Europe is probably the most attractive of those regions right now,” he added.
The other challenge facing investors, argues Daniel Needham, Morningstar Investment Management CIO, is that while the level of risk has not really come down, the reward one gets for bearing risk has decreased.
“We try and handicap the whole opportunity set on what we consider to be reasonable cashflow and earnings assumptions,” he explained, “The hurdle is, can you do better than cash.”
Given the level of uncertainty facing markets at the moment, Needham said, the firm feels it is incredibly risky to take duration risk right now.
“At the end of the day, if rates rise more quickly than expected then everything gets hit,” he said.
Such an approach does not elicit high fives from clients when buying and selling things, but it has served the firm well and, Needham believes that it is likely to continue to do so.
As Kemp pointed out, there is a reason why investors can name individually the people that have successfully called a crash or a downturn – it is incredibly difficult to do. But, he says, investors continue to try and make broad macro calls.
“You have to choose the time period over which you want to win,” he added, and for Morningstar that has always been the long term.
