John Leonard, CFA
Global Chair of Equities — Macquarie Investment Management
I think one of the reasons that there’s, you know, remaining fear, or, at least antipathy, with regard to equity is the fact that people have been underinvested, and not just individual investors. We’ve seen only two years in the last decade where there were positive inflows into equity mutual funds. But further than that, institutional investors, in the form of pension plans, have been steadily allocating away from equities and towards bonds and, to a lesser degree, towards alternatives.
So, instead of the traditional, what you think of [as] the 60/40 equity debt kind of allocation, I think the average plan is roughly the opposite: 40/60. So, and that, in turn, I think, leads to a reluctance as, “I’ve been underinvested in equities. The market’s gone up. I’m still underinvested. It’s gone up some more.” And that leads to a natural cycle of people being reluctant to jump in at a time when they think valuations potentially are high, and yet if you look at equities just in abstract, it’s a reasonable place to be invested.
Small cap growth, small cap value, small cap all around the world, presents interesting opportunities. It certainly can include things that have more of an absolute return mentality, but are not traditional long shorts, so if you think about it, sort of the way you would approach managing your own money – “I’m willing to perhaps lag a little bit in a strong out market, but I don’t want to lose a lot of money.” So, more of an absolute return mentality towards management. And then certainly it includes the full-on long short hedge fund type of alternative opportunities. All of those things represent good opportunities for active investors who have skill to add value for their clients, and they absolutely earn their fees.