Cash signals caution among Frankfurt-based global equities funds

Global equities fund managers based in Frankfurt are currently far more cautious on the outlook than their UK-based counterparts, says Standard & Poor’s Fund Services in its latest update on the sector, available at funds-sp.com.

The cautious view of the markets was reflected in high levels of cash held at the time the fund managers were interviewed, shortly before the recent sell-off. For example, Olgerd Eichler at Union Investment had become nervous about valuations generally, raising cash to almost 9% in Uniglobal and 14% in the S&P A-rated UniValue Fonds Global. The team at DWS showed similar caution, with Klaus Kaldemorgen raising cash to 9.5% in the S&P AAA-rated DWS Akkumula and Marc-Alexander Kniess holding roughly the same percentage in the S&P A-rated DWS Intervest.

Despite the differing levels of caution in Frankfurt and the UK, there is broad agreement about regional allocation. “Managers are generally negative on the US but positive on Europe. Many see the economy in the US as decelerating while in Europe it is accelerating,” said Alison Cratchley, lead analyst at Standard & Poor’s Fund Services, adding that Europe, in contrast to the US is seen as offering considerable potential for margin improvement. Elsewhere, Asia ex-Japan is preferred to Japan. The team at Fortis remains most bullish on Asia ex-Japan, viewing this region as benefiting from capital inflows and offering investors good turnover and profit growth.

Looking back over the fourth quarter and full-year 2006, investors in global equity funds were well rewarded, thanks to continued strength in their markets. The smaller companies sub-sector returned a median 11.7% in the fourth quarter, against 9.3% for the median mainstream fund. Over the year as a whole, mainstream funds recorded a median return of 20.6%, against 19.9% from smaller companies funds.

For individual funds, the sources of outstanding performance were: regional allocation, sector allocation and stock selection. One of the top-performing funds in the fourth quarter was the S& P AAA-rated Gartmore Global Focus Fund (identically managed to the offshore Gartmore Sicav Global Focus Fund). Manager Neil Rogan told S&P that 90% of added value came from stock selection. The biggest winner in the fourth quarter was US property company CB Richard Ellis, which reported very strong results. Other successes from a range of industries were Continental Airlines, off-index Argentine oil services company Tenaris and console maker Nintendo.

At the other end of the scale, poor stock selection, particularly in the US and Japan, was a significant cause of underperformance. The S&P A-rated Baillie Gifford International Fund ranked in the bottom quartile of the S&P global equities mainstream sector in the fourth quarter of 2006. The main detractors from returns were US equity holdings: Fastenal, T Rowe Price, Schlumberger and Mohawk. The fund was also hurt by a holding in Japanese consumer lender Promise.

Another bottom quartile performer in the fourth quarter was Fidelity Funds Selection International Fund, where the US component of the portfolio exerted a considerable drag on performance because it tended to have a significant growth bias.