Survey: Fund Managers Foresee Weakened China Economy

A new BofA Merrill Lynch Survey of Fund Managers for May shows that a net 28% of regional fund managers expect China's economy to weaken in the coming year, up from a net 15% in March.

(May 18, 2011) — Despite the continued strength and confidence in emerging markets, a net 28% of regional fund managers expect China’s economy to weaken in the coming year, up from a net 15% in March, according to a new Bank of America Merrill Lynch May Survey of Fund Managers.

However, this waning confidence in China’s economy – as well as in other important BRIC economies — has not negatively impacted allocations to emerging market equities, which continue to rise. A net 29% of the respondents now have an overweight position in emerging market equities, representing the highest reading in any region and compares with a net zero percent two months earlier.

Beyond emerging markets, the survey shows that an increasing number of fund managers have a pessimistic outlook on corporate profitability and global growth, with a net 10% of fund managers saying the world economy will strengthen in the next 12 months, down from a net 27% in April. The survey states that participants’ lower conviction about global growth and profit is most evident in Europe, reflecting investors’ identification of the eurozone sovereign debt crisis as the largest tail risk globally.

Furthermore, 73% of investors expect the US Federal Reserve to start increasing rates next year compared with a similar proportion who thought in April that it would occur in 2011.

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In terms of asset allocation, the survey demonstrates that fund managers have trimmed their exposure to equities and commodities, while adding to cash and bond holdings slightly. “A triple dip in growth expectations is reshaping investors’ stance on risk,” says Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research, in a statement. “A risk for investors is that pessimism on Europe now looks to be overdone, particularly in light of strong recent GDP data,” adds Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

The survey was conducted May 6-12 and included 284 fund managers with a combined $814 billion in assets under management.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The nation's largest public pension fund is slashing its investment associations with Iran and Sudan, fully complying with state divestment laws passed in 2006 and 2007.

(May 18, 2011) — The $236 billion California Public Employees’ Retirement System (CalPERS) has asserted that it plans to shed the rest of its Sudan and Iran-linked holdings.

The move is in response to strong sanctions adopted in 2010 by the federal government, the United Nations, and European Union, which started the withdrawal of several large multi-national oil and energy companies from Iran, which has been identified as a state sponsor of terrorism, as well as Sudan, which has been cited for genocidal acts.

In 2006, the Legislature passed laws instructing the state’s pensions — CalPERS and California State Teachers’ Retirement System (CalSTRS) — to withdraw their money from Sudan and Iran a year later. Instead of ordering immediate divestment, however, the laws provided the pensions with additional time to give them greater ability to follow through on their fiduciary duty.

Following the legislation, CalPERS adopted an initial Sudan divestment policy in 2006. While the nation’s largest public fund once had $2 billion invested in 47 companies in the two countries, CalPERS now owns shares valued at approximately $160 million in only eight companies that fall within the parameters of the State’s Iran and Sudan divestment acts, according to a statement on the fund’s website.

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“The cost of continuing to hold the stock of these eight companies is greater than the value of divesting them,” said Rob Feckner, CalPERS Board President. “Consistent with our fiduciary duty as trustees, we’re taking this step in the best interest of the Fund.”

Investment committee chair George Diehr added: “We plan to mitigate and compensate for the cost of executing trades by implementing sales over time rather than precipitously. We also will use the sales of these company shares to adjust an allocation overweight in our Global Equity portfolio, and avoid the continuing engagement costs.”

Other funds have faced mounting pressure to exit holdings of Iran. In August 2010, Massachusetts Governor Deval Patrick signed legislation that will force the state pension fund to divest from companies supporting Iran’s oil industry. According to the legislation, the Massachusetts Pension Reserve Investment Board (MassPRIM) – which manages roughly $42 billion on behalf of public entities in the Bay State – has one year in which to hire an independent research firm to conduct a study of its holdings and divest from any companies that invest in the Iranian oil industry. The MassPRIM board must also update the list of prohibited companies on a quarterly basis, the law stipulates.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742