Institutions Cut Back on Equities

Institutional investors continued the pattern established late in 2011 of reducing allocations to equities, according to results of the State Street Investor Confidence Index for February 2012.

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“Given that equity returns have been positive over the last one and three months, it is clear that these institutions have been ‘liquidity providers’ in the market, comfortable with rebalancing their portfolios at these higher valuations,” stated Harvard University professor Kenneth Froot, who developed the index alongside Paul O’Connell of State Street Associates.

“At the same time, we do note a pro-cyclical bias to the reallocation: institutions are keen to hang on to, or even increase, their holdings of pro-growth sectors such as industrial and consumer discretionary stocks, while cutting back on consumer staples, healthcare and telecom stocks.”

Globally, the ICI fell to 86.5, down 6.1 points from January’s revised level of 92.6. However, the outlook of European investors, by contrast, improved, with the European ICI rising 4.0 points from January’s revised reading of 91.2 to reach 95.2. In Asia, investor sentiment stayed relatively static, ticking down 0.3 points from a revised January reading of 96.6 to end at 96.3.

“The latest round of policy developments in Europe went some way towards lowering the risk of a catastrophic ‘tail event’ crisis, and this improved the mood of European investors,” stated O’Connell.

Asian investors held their outlook constant, though we did note that net purchases of Pacific ex-Japan equities by all global investors were relatively robust. It is among US investors that the tendency to sell into the recent market strength was most pronounced.”

The State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their allocations to risky assets.

Hung Tran writes for Money Management Executive.