Foreign Attractions

Despite the ASX200 crossing 5000-point mark in recent weeks, Australian fund managers have continued to increase their weighting in overseas shares, according the latest Russell Investment Manager outlook.

The report surveyed 52 Australian fund managers between March 5 and March 13 this year. The responses it received reinforce the idea that the euphoria generated by the Australian market’s three-year bull run is giving way to anxiety, as investors identify the current situation as a “point of maximum financial risk”.

Over the past three quarters of the survey, the number of managers who favour international equities has been growing steadily. The June 2005 report announced that 49% of managers surveyed were bullish on international equities; that figure is now 80%.

The move away from Australian equities has been pronounced, yet the bearish stance of fund managers towards local small-cap stocks has softened, from 73% in June to 51% in March.

Despite the improvement of this particular asset class, the chief executive of Russell Investment, Peter Gunning, does not see any reason for fund managers to change direction. “The market trends of the past three years are not sustainable,” he says. “Until we see the gap between returns and valuations shift or narrow, we can expect manager sentiment to remain unchanged.”

Gunning points out the lagging US equity market as a particular focus of interest. MSCI indices show the US returned 17.7% over the past three years (to March 27) compared with success stories such as the North European countries’ return of 34.8% and Japan’s 30.5%.

The report implies that investors are waiting for, and expecting, a significant change in the US situation soon. As Gunning himself says: “A defined change in the US scenario could be the catalyst investors are waiting for.”