Institutional investors have put more money into global strategies since the start of the year, but retail investors and their financial advisers so far seem to be behind the curve.
DETROIT — Institutional investors have put more money into global strategies since the start of the year, but retail investors and their financial advisers so far seem to be behind the curve.
Mutual fund investments show that retail investors, when seeking international exposure, continue to favor pure international strategies, which invest only outside the United States, over the global perspective, which includes the United States.
Institutional investors, on average, increased their global investment allocations to 15.4%, from less than 2% at the end of last year, according to Eager Davis & Holmes LLC, a Louisville, Ky.-based data-tracking firm.
The recent allocation shift stands in stark contrast to the 1.9% average allocation to global strategies between 2002 and 2006, according to the quarterly research findings.
Year-to-date through last month, international-mutual-fund strategies had net inflows of $70 billion, compared with $18.5 billion of net flows into global strategies, according to Lipper Inc. of New York. Last month alone, international mutual funds had net inflows of $6.4 billion, while global funds had net inflows of $2 billion, according to Lipper.
International funds, which don’t include country- or region-specific strategies, had net inflows of $98.3 billion last year, while global funds had net inflows of $24.7 billion.
Investor mind-set
Market watchers attribute the reluctance by retail investors to embrace a global strategy to a combination of factors, including their U.S.-centric attitude.
“Our view is that the rest of the world is becoming much more economically significant, and as an investor, you should be looking to tap into that growth,” said Giles Conway-Gordon, a partner at Cogo Wolf Asset Management LLC. The San Francisco-based fund-of-hedge-funds group has $100 million under management.
As Mr. Conway-Gordon pointed out, the United States represents 22% of the world’s gross domestic product and 45% of global-equity capitalization.
Yet U.S. retail class investors typically keep their portfolio allocations heavily weighted close to home.
“We think this is an historical matter,” Mr. Conway-Gordon said. “As the equity capitalization and GDP of the United States starts steadily falling, China and India will eventually become the first- and second-largest economies.”
For advisers, the notion of going global could mean conceding expertise with regard to domestic equity, which can be a sensitive issue.
“For large-company allocations, I will use global funds, because I want those companies to compete globally. But for smaller companies, I divide it into international- and domestic-equity funds,” said Paul Baumbach, co-founder of Mallard Advisors LLC in Newark, Del.
Mr. Baumbach, whose firm oversees $90 million in client assets, acknowledges the advantages of global allocations regarding large-cap stocks, but he believes that he can still add value by separating international and domestic funds when it comes to smaller-company allocations.
Part of the reason more advisers haven’t moved in the direction of what some analysts speculate will eventually lead to global as a core strategy comes down to product availability.
“Frankly, I used to have to combine international and domestic just to get a global approach, but there are a lot more global-fund choices now,” said Chuck Gibson, president of Financial Perspectives Inc., a Newark, Calif., firm that oversees $55 million.
A growing appetite for global strategies was exactly what the Russell Investment Group of Tacoma, Wash., had in mind when it launched the Russell Global Equity Fund in March.
“There is an appetite for global strategies outside the U.S., and it’s only a matter of time before the U.S. retail investor starts to see things that way,” said Ron Dugan, Russell’s director of global equity.
“The United States is still the world’s largest stock market, and at least for the next generation, we think retail investors will be predisposed to having most of their investments in the U.S.” he added.
The retail-investor preference for international over global strategies could also be tied to the recent poor performance of the U.S. equity markets, according to Tom Roseen, a Lipper senior research analyst.
“Money has been plowing into international pure-play funds because a lot of people feel they already have enough U.S. equity exposure,” he said. “And global strategies in general haven’t done as well as some of the international categories because of that exposure to the U.S. markets.”
For example, over the 12-month period ended Aug. 16, the mutual funds in Lipper’s U.S. equity category averaged a 10.09% gain. That compares with a 14.07% gain for the world-equity-fund category, and a 49.73% gain for China region funds tracked by Lipper.
All things considered, the migration among institutional investors toward more global strategies makes perfect sense, according to David Holmes, a partner with the research firm Eager Davis & Holmes in Louisville, Ky. “Global strategies do give the portfolio managers more flexibility, and it could be argued that it’s overly restrictive to assign a domestic mandate,” he said. “I think it’s interesting, and it will be an interesting space to watch, because it shows signs of embracing the idea that we’re truly a global economy.”
