Jeremy Gardiner, director at Investec Asset Management, says the third quarter collective investment scheme statistics, released by ASISA this week, suggest that many retail investors have largely missed the equity market recovery.

The third quarter saw a continuation of the rally in global equities that commenced in March. The release of the third quarter collective investment scheme statistics by ASISA, as well as global mutual fund statistics released this week, reflect several broader themes:

• Relative to developed markets, emerging markets have been particularly popular, attracting record investment flows.
• US markets have seen the opposite, with Mutual Funds and ETFs losing a net $53 billion¹ this year, despite the S&P500 rising more than 60% since March.
• The SA unit trust industry has reacted more in line with its emerging market counterparts, with strong inflows, although flows into equity funds have been relatively weak.

Clearly, and particularly in the developed world, retail investors have not trusted the equity market recovery. And why should they? After all, consensus was that this was a dead cat bounce, i.e. that markets were supposed to lift 10% or 15% and then fall in a heap again, so there would be no need to chase this market. Unfortunately for them, the fall never came, and most investors are still sitting on the sidelines. Also noteworthy is the significant move by investors into asset allocation funds. Finding the current volatility too difficult to navigate, they are delegating responsibility to the professionals. This is in stark contrast to bull markets, when everybody suddenly becomes a portfolio manager!

It is encouraging to see some investors taking advantage of recent rand strength to invest in foreign funds – far rather at current levels than in a panic, shortly after a rand collapse

So where to from here?

Equity markets have run hard, and several markets are looking exhausted from a pricing perspective. Given the fact that earnings should remain under pressure, a retracement in the short term is a distinct possibility. According to the Financial Times² in London, there is $3.3 billion sitting in money market mutual funds, earning close to zero. This is down from a crisis high of $3.8 billion, but apparently the money leaving the security of cash has ventured into bonds in the US and not much further, thereby missing the equity recovery.

In summary, those investors already in equities feel a sense of relief, as their portfolios have recovered substantially from the devastation. Those in cash, however, are feeling frustrated, as very few actually invested in March (or since then). However, investors should tread carefully: equity markets are not nearly as attractive as they were 60% ago and earnings will remain under pressure, as the global economy is by no means fixed.

Rather phase funds in over the next few months than invest everything all at once, and use any weakness as a buying opportunity. There is however a wall of money waiting to get in and although not fixed, the world is definitely healing. Weakness should therefore be brief and limited in depth, given that you are not the only one feeling left out and looking for an opportunity to get in.

¹ EPFR Global
² Financial Times, 27 October 2009