Global equity returns more volatile in 2005

By Ross Kelly

Investors should allocate 25 per cent of their portfolio to international equities as growing volatility in global markets gives good stock pickers better scope for outperformance, according to a new review of the sector by vanEyk research.

The van Eyk report says the volatility of returns from the international equities sector are at historical lows, presenting a tough environment for stock pickers and fund managers with strict benchmark orientated management styles.

“Consequently, we’ve seen a decline over the past year in the tracking error of almost all the fund managers we reviewed,” said van Eyk head of research and ratings Suzanne Tavill.

However, the report predicts that the level of volatility cannot be sustained given an ever-weakening US dollar, the US government’s decision to rapidly cut its twin deficits, and a weakening earnings cycle.

“Historically, when there has been a sudden rise in volatility, returns tend to fall. However, an orderly rise in volatility could be associated with mixed return responses... providing greater opportunities for stock pickers and managers that can short stocks,” Tavill said.

The report also urged investors to implement strategies such as hedging to protect them from the possible adverse effects of swinging currency values.

“Australian investors’ returns from international markets are strongly impacted by currency movements,” Tavill said.

As part of the review, van Eyk recommended 25 per cent of a ‘balanced’ investor’s portfolio be exposed to international equities.

Meanwhile, in another report, the Sydney-based research house predicted 2005 could be a good year for what it calls ‘specialist’ Australian equities managers, defined as fund managers that attempt to add value in rising and falling markets or seek to reduce negative returns in falling markets.

If, as predicted, the Australian share market performs weaker this year, these specialist managers, which include Alpha, PerpetualInvestments, Rubicon Asset Management and SG Hiscock, will have the potential to thrive, the report said.