`Wall of Cash' to Extend Stock Rally Into 2010, Aberdeen Says By Peter Woodifield
Oct. 7 (Bloomberg) -- The global recovery in stock markets will stretch into 2010 as people try to make more money than they can from cash and government bonds, according to the investment chief of Scotland's largest money manager. "There is a wall of cash out there seeking income-earning assets," Anne Richards, who oversees 129 billion pounds ($207 billion) at Aberdeen Asset Management Plc, said in an interview at the company's offices in Edinburgh. "That wall of money will be supportive into next year." The Standard & Poor's 500 Index in the U.S. has staged the biggest rally since the Great Depression, soaring more than 50 percent from a March low as economies around the world emerge from recession. The FTSE 100 Index in the U.K. and Germany's DAX Index recorded similar gains, while Hong Kong's Hang Seng Index advanced more than 80 percent. American investors hold $3.5 trillion in cash, a higher proportion of the net assets of the companies in the S&P 500 Index than at the peak of the market in 2007, according to data compiled by the Investment Company Institute in Washington and Bloomberg as of Sept. 28. At the same time, interest rates worldwide are at or near record lows. The U.S. Federal Reserve cut its rate in December to between zero and 0.25 percent. The Bank of England trimmed its benchmark cost of borrowing to 0.5 percent from 5 percent between September and March. The yield on two-year U.K. government notes has held below 1 percent since Aug. 12 and is at its lowest since 1992. Too Much, Too Soon While investors want better returns from stocks, Richards also said she expected indexes to give up some gains. New York University Professor Nouriel Roubini, who predicted the financial crisis, said on Oct. 3 that markets had gone up too far and too rapidly and that there may be a correction this quarter or next. The S&P 500 Index dropped 4 percent during the two weeks to Oct. 2, while the FTSE 100 Index fell 3.6 percent. "Markets have got a bit ahead of themselves, and we might see the rally come back a bit by the end of the year," she said in Aberdeen's boardroom overlooking the Scott Monument on Princes Street in the Scottish capital. Aberdeen, whose headquarters is in northeast Scotland, keeps more money in fixed income than in stocks, preferring corporate bonds over government debt. The company suffered last year as credit declined, losing investors 3.2 percent in 2008, according to Merrill Lynch & Co. data. Bond Strategy Chief Executive Officer Martin Gilbert focused on bonds as he resuscitated Aberdeen following the collapse of split-capital trusts. The company was the biggest seller of the U.K. funds, which regulators said lost clients 620 million pounds as stock markets declined between 2000 and 2003. "One of the things we learned was that with a lot of equities you get acute variability in the income line," Richards, 45, said. "We haven't had to react quite as viciously as pure equity houses in the last 12 months." Aberdeen last year, though, failed to take its own advice, leading clients to pull 11.7 billion pounds of bond assets in the nine months to June 30, the company said July 27. The money manager was caught out by the demise of Lehman Brothers Holdings Inc. because credit-backed securities are the core of its holdings in U.S. bonds, said Richards. The firm told clients of its concerns about sub-prime mortgages and collateralized debt obligations, though didn't expect Lehman to file for bankruptcy, she said. "We were right, but not right enough. We were effectively long credit," said Richards. "Why didn't we follow up good analysis? Probably we didn't spend enough time reflecting upon what macro shocks could occur that might throw things off." `Long, Slow Haul' That resulted in all of Aberdeen's main bond strategies, headed by investments in residential mortgage-backed securities, underperforming their benchmarks last year. Performance in the three months ended Sept. 30 is likely to be better than the previous three months and together will outweigh the losses in the first half, Citigroup Inc. analyst Haley Tam said in a note to clients Oct. 1. In 2008, Aberdeen's U.S. so-called core plus funds lagged behind their benchmarks by more than 19 percentage points, Paul Griffiths, the global head of fixed income, told investors in a presentation. In the first half of this year, the same funds beat the benchmarks by 6.9 percentage points, said Griffiths, who joined Aberdeen at the start of July with its acquisition of parts of Credit Suisse Group AG's fund business. Aberdeen's shares are up 22 percent this year, valuing the company at 1.5 billion pounds. "The performance has come back big time this year but there is still a huge amount of ground to make up," said Richards, who joined Aberdeen in 2003 following its takeover of Edinburgh Fund Managers Plc. "It will take time to rebuild performance, it is a long, slow haul."
