Asset AllocationJuly 15, 2015

Fed Rate Rise 'Not the Only Show in Town'

“Diversify more, expect less” in 2015, say strategists—and don’t dwell too much on the next Federal Reserve announcement.

Reported by Featured Author

Investors should not focus too much on the expected rise in the US’ base interest rate later this year, consultants and fund managers have warned.

The Federal Reserve’s rate-setting committee is widely expected to announce an increase for the first time since 2006 later this year, although a recent survey of fund managers revealed a split in consensus of the timing of such a move.

“Most pension funds are still investing more liquid than they need to and they are not fully exploiting the opportunities private markets can offer for a long-term investor.” —Alex Koriath, Cambridge AssociatesInvestment consultant Cambridge Associates warned that pension funds risked “squandering their gains during the bull market if they pin their hopes on a hike in interest rates”.

The group claimed some pension funds had been hoping for an interest rate rise that would reduce their liabilities, but Cambridge said investors should continue their search for alternative growth assets.

Such growth was unlikely to come from stock markets, according to Cambridge’s Alex Koriath, head of the UK pensions practice. “The public equity markets are not an option because valuations are so unattractive,” he said.

In US large caps, for example, the latest bull market run had resulted in valuations far in excess of fair value, Koriath said. Cambridge’s research indicated that US stocks would require a 29% drop in price or a 40% hike in earnings to return to “fair value”.

Strategists at JP Morgan Asset Management said investors should “diversify more and expect less” in the second half of 2015.

“With policy rates going up this year in the US and the Bank of England not far behind, volatility in bond markets may only intensify,” said David Stubbs, global market strategist at the group.

Stubbs added that it was “more important than ever for investors to diversify” as volatility was expected to spike.

Cambridge Associates urged investors to consider unlisted assets, such as private equity. The consultancy said investors should allocate “at least” 10% to the asset class to have a meaningful impact on portfolio returns—pension funds in the UK typically invest much less than this.

“Most pension funds are still investing more liquid than they need to and they are not fully exploiting the opportunities private markets can offer for a long-term investor,” Koriath said.