Institutional Investing in 2014: Hunt Carefully for Relative Value, Temper Expectations
January 14, 2014 - BOSTON, MA
With assets bid up across the risk spectrum thanks in large part to quantitative easing, institutional investors are left with basically one thing to do in 2014: Look for relative value opportunities, according to new research from global investment advisor Cambridge Associates.
"Because of the absence of significant valuation opportunities on the heels of a strong 2013, tempered expectations are appropriate. That said, relative value remains, and investors should lean into what is relatively cheap," said Celia Dallas, Chief Investment Strategist at Cambridge Associates.
Cambridge Associates believes the following are essential points that long-term investors should keep in mind:
- Do not count out U.S. equities -- quite yet. While many analysts fret that U.S. equities are in a bubble, completely divorced from fundamental value, Cambridge analysis says they're not quite in a bubble, but getting close to a point where backing off may make sense.
- Expect headwinds from the Fed's eventual liquidity withdrawal. Beyond bonds, where there will naturally be pressure on high-quality, long-duration credits as well as low-quality credits, other assets will be vulnerable, in part because they remain expensive. They include master limited partnerships, REITs, utility-heavy low volatility equity funds and some dividend-yielding equities.
- Overweight European equities relative to U.S. equities. Even after the European market's strong performance in 2013, equities are still not expensive. And with earnings still 30% below their 2007 peaks, it would not take much growth for European equities to outperform more expensive U.S. equities.
- Modest overweighting of emerging markets makes sense for long-term investors, but do not expect a repeat of massive emerging market outperformance of 2003-2007. Emerging market equities offer compelling value relative to U.S. equities. However, within emerging markets, the cheapness is concentrated, so what you own matters. Carefully consider implementation. Increased exposure to pricey consumer stocks will likely not achieve the desired results. And, given near-term headwinds, it would be wise to stand ready to increase emerging market overweights if valuations become depressed.
"What's an investor to do? We believe the imperatives include: limiting exposure to assets that would be vulnerable to a rise in interest rates; exercising caution when it comes to credits; putting U.S. equities on a valuation watch list; monitoring Japanese equities for cheapness and watching for progress on structural reform there; and being prepared to increase deflation-hedging and inflation-sensitive allocations should valuations continue to improve," said Ms. Dallas.
To obtain an executive summary of Cambridge's research or to schedule a conversation with Celia Dallas, please contact Frank Lentini, Sommerfield Communications at (212) 255-8386 / Lentini@sommerfield.com.
About Cambridge Associates
Founded in 1973, Cambridge Associates is a provider of investment services to institutional investors and private clients worldwide. Today the firm serves more than 950 global investors and delivers a range of services, including investment consulting, discretionary investment solutions, research and tools (Research Navigator(sm) and Benchmark Calculator), and performance monitoring, across asset classes. Cambridge Associates has more than 1,100 employees based in eight global offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.
Sommerfield Communications, Inc.