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Expected volatility may hit investors: Principal Global CEO

They should diversify portfolios in this period of increased volatility, he says

JIM McCaughan, chief executive of US asset manager Principal Global, has turned cautious on the market, warning that expected volatility could cause worried investors to exit at a loss.

His broad market outlook, however, is for a number of interest rate cuts which could boost equity markets.

Still, poor economic data, pressure on US consumer spending and continued uncertainty over credit markets will dog investors.

‘The housing market in the US is in a bit of a mess,’ he says. ‘There is excess inventory quite apart from the fact that the mortgage market has seen a much tighter supply of mortgages . . . The situation is bad enough to put continued pressure on consumer spending for the next year or two.’

A weak US dollar, however, has begun to spur exports.

‘We’re in a period of increased volatility. There will be some pretty bad days that will frighten people, but I don’t expect a big setback in the US market,’ Mr McCaughan says.

He urges investors to diversify their portfolios. ‘Volatility is not necessarily a bad thing. It allows you to get in at good prices from time to time. The main strategy should be to diversify and take a long-term view.

‘Those are the ways to protect the investor against the short-term vagaries of the market. The investor who panics and sells low is the one whose return is hurt.’

Principal Global itself manages a diversified range of assets – equities, fixed income and real estate. It currently manages some US$220 billion in assets, compared to US$80 billion in 1999.

According to an article on its website, the group is gunning for US$500 billion in assets under management, and headcount is expected to rise by 25 per cent over the next few years. Singapore is its base for the Asia ex-Japan region.

The group has a partnership with China Construction Bank to market mutual funds in China. Over a period of about two years, assets have grown to between US$5 billion and US$6 billion. It also has a partnership in Malaysia.

Mr McCaughan says concern over inflation is overdone. ‘In the US, companies’ pricing power is limited; real inflation is limited. We’re not fearful of inflation . . . We think there are more rate cuts to come. That will create a fairly good backdrop for markets.

‘We think there may be 50 to 75 basis points in cuts over the next six to nine months. We think that’s probably about right. Fed funds rate at 4 per cent may well be the case in six to 12 months.’

The group sees opportunities in global real estate. It manages some US$40 billion in real estate assets, making it the fourth-largest institutional real estate manager in the United States as at 2006.

‘There are opportunities particularly in US Reits that have been held back by changes in the credit market . . . The fundamentals of commercial real estate are encouraging.’


Souce: Business Times 17 Oct 07

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