Tuesday, October 09, 2007

Would you let this man manage your money? Ian Wace edition!

Real asset managers should know better than to make bold, categorical statements about the future direction of stock prices. Alas, many still have to learn that lesson. Take this gem:

Ian Wace, co-founder of the $17 billion hedge-fund manager Marshall Wace LLP, expects an ``absolute explosion'' in share prices globally as company profits increase.

Given that the share of corporate profits in national income is at historically high levels in many countries and that the world economy is headed for a slowdown, that statement sounds pretty, hmm, unsound. What makes him say this?

Stocks ``offer phenomenal value,'' Wace said today at a conference in Milan. As some central banks lower interest rates, that will also help lift stocks, he said. Shares of the largest companies will benefit most, said the manager, whose MW Tops Fund Ltd. has returned about 18 percent a year since it started on Dec. 31, 2004, according to data compiled by Bloomberg.

There will be a ``massive splurge in major, liquid, large caps,'' Wace, 44, said. The money manager, whose firm bets on equities by compiling analyst research from 253 brokers worldwide, didn't say how much he expects markets to rise.

Where to begin? Central banks are cutting rates due to the risk of a falloff in growth, something hardly compatible with a jump in profits. Sure, dropping rates may provide some support for stocks based on asset allocation grounds, but it could hardly be deemed "massive". Of course, the key here is that this fund invests based on sell-side research which always, to put it kindly, has a vested interest in erring on the side of optimism.

P.S. By the way, Bloomberg states that the average P/E multple for the MSCI World Index (which has risen about 15% a year since year end 2004) averaged 29 times over the past ten years, compared to 17 times now. Needless to say, comparing valuations now to the average that includes the dot com bubble years is misleading. For the S&P 500, the 70 year average P/E is close to 16 times, close to the current level. Since when is it a reporter's obligation to support the subjects investment opinions? Shouldn't it be his job to be a tad more skeptical?