There are a lot of differences between institutional managers and retail advisors, especially when it comes to Canada’s economic outlook. Two new surveys, one looking at institutional advisors and the other at retail, show wildly different opinions between these groups.
Russell Investments found that institutional managers were becoming more bearish on Canadian equities, with only 33% of respondents saying the market will do well in Q3. By contrast, 43% of those surveyed in Horizons BetaPro’s survey were bullish on Canadian stocks.
“We’ve had such a great run and everyone was pricing in the good news,” says Sadiq Adatia, Russell’s chief investment officer. “When we started seeing the GDP numbers come down last quarter, people started realizing that Canada is slowing down. They’re now thinking, ‘maybe we should take money off the table in Canada and move it elsewhere’.”
In Russell’s survey, that “elsewhere” is into U.S. stocks. The report reveals that bullishness in the U.S. market has increased from 33% to 45% quarter-over-quarter. Adatia says American markets have already priced in a lot of the negative news, making companies in the States more attractive to Canadian investors.
“We’re close to the bottom,” he says. “It may stay there for a bit of time, but if there’s a bit of a rebound we could see a rally.”
In the Horizons survey, 50% of respondents were bearish on the S&P 500 — up 14% from last quarter — while 43% were bearish on the NASDAQ, up 9% quarter-over-quarter. Howard Atkinson, president of Horizons BetaPro, explains that “rising commodity prices, leading to rising inflation and interest rates coupled with persistent U.S. housing and credit problems, make the U.S. market less attractive than the Canadian equity market.”
Attitudes on the materials sector — specifically gold — were varied as well. Institutional advisors’ bullishness towards the materials sector dropped from 62% to 32%, while 70% of retail advisors were bullish on gold, versus 11% who were bearish.
“People feel that gold has gone up way too quickly,” says Adatia. “Also, the U.S. is talking about fighting inflation and opening the door to rising rates down the road. If that’s the case, gold as a hedge against the U.S. rate of inflation is probably not needed.”
However, Atkinson says gold prices could increase if rates rise. “High long-term rates, fueled by inflation, mean gold would do well.”
While both surveys found a preference for equities over bonds, institutional managers are more bullish on U.S. bonds than retail advisors. Horizons found 53% of those surveyed were bearish on the U.S. 30-year bond. While there was no statistic for American bonds in the Russell survey, Adatia says that managers “favour U.S. bonds over Canadian bonds. There’s more upside there. They’re getting good value now.”
Atkinson says that retail advisors’ bearishness on the U.S. 30-year bond reveals that many respondents feel that long-term interest rates will increase because of rising inflation. “I say that because their bearish views on bonds, Canadian financials and the S&P 500, accompanied by bullishness on grains and most commodities, would weave that scenario,” he says.
Opinions fell more in line when it came to the energy sector. Both institutional and retail managers are split on how well the sector will do in the third quarter. In Russell’s survey, 51% were bullish towards the sector and 41% were bearish. In Horizons’ report 48% were bullish, 30% were bearish and 22% took a neutral position.
Bearishness towards the financial sector was also even between the two surveys, with 43% of institutional investors, and 47% of retail advisors taking that view. On the other hand, 43% of investment managers were bullish on financials, while 30% of retail advisors shared that position. (Twenty-seven per cent stayed neutral.)
While the differences between institutional and retail advisors seem significant, both Atkinson and Adatia say it might have to do more with timing than anything else. “What a difference two weeks can make,” says Atkinson. “The survey results are sensitive as to timing.”
Adatia agrees. Even within his own report he says results would be different today from what they were when the survey was taken. “What we saw in the last few days might tell people that the Canadian market is overvalued, but then all of a sudden it’s been taken back 10% and people might have different ideas.”
The discrepancies between the two surveys might also have to do with how different managers develop their portfolios. Atkinson says weightings, currency views and whether U.S. equity exposure is currency hedged or not could all have a significant effect on results.
Adatia adds that institutional managers are usually more diversified than retail. “For retail there are more, bigger bets and sector deviations that sometimes play on particular commodities,” he says. “Institutional are more cognizant of concentration issues.”
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(07/09/08)