Rational thinking in short supply among money managers

Despite a mountain of evidence the size of Everest to the contrary, there is still no shortage of people out there who think the markets are always rational. Piffle, say plenty of others. It’s a debate for the ages.

State Street Global Advisors (SSGA), the investment- management arm of the State Street corporation that has a big presence in Dublin, has put out some interesting research that suggests many investors contradict themselves.

SSGA canvassed the views of about 420 chief investment officers and portfolio managers, the sort of people who should know what they’re talking about. It found that the “pressure to perform” is resulting in investors making errors in what they buy, their expectations and their contingency plans for if/when things go belly up. About 63 per cent of investors said they had increased their holdings in equities recently, most of them in the last six months. But about 60 per cent of these same folk believe a global stock market fall of between 10 and 20 per cent is on its way in the “near term”.

So most investors believe share markets are going to tank, yet they keep filling their boots. Where’s the reason in that? Half of investors would like to slim their equity portfolios but don’t know what else to buy because they feel there’s less money to be made than in stocks and shares.

“Pressure to secure returns is driving a significant contradiction in what investors believe and the actions that they are taking,” says SSGA. It warned that its survey findings revealed a “lack of in-depth understanding of downside protection strategies”.

SSGA also reckons many investors need to do a much better job of hedging their bets in case of volatility.

“In general, there [is] a high degree of possibly misplaced optimism, with nine out of 10 investors being confident in their portfolio’s ability to weather a major market correction.” All told, there are money managers out there who don’t appear to have a rashers what they’re doing with their clients’ money.

Heaven forbid.