Managed Funds We've cracked the trillion!

According to the treasurer:

http://www.treasurer.gov.au/tsr/content/pressreleases/2006/061.asp

So what does this mean for the "weight of money" theory that the market will just have to keep moving up and that there's a paradigm shift on the way as a result. Will all that cash chasing a home lead to an erosion of the risk premium, i.e. the return we expect for investing in assets riskier than cash?

At the big end of town, there seems to be a compression of banks' interest rate margins and private equity firms are paying prices that would have been unheard of a few years ago to buy assets...

What do ppl think? Is there a fundamental shift in pricing of risk going on or am I just falling for the old "this time it's different" view...

Cheers
N.

 

Nigel,

I don't know about eroding the risk premium - perhaps eroding the common sense concepts that should help investors (big and small) calculate and price based upon expected reasonable risk / returns is closer to the mark.

I was at a presentation from a fund manager of a large Aussie LPT last week. He showed a graph of the price of the fund vs actual assets, essentially the price that investors are paying (indicating their expectations of return) above the fund assets / capital. Since 2000 the margin has increased greatly. My simple reading of this - so much money chasing returns means that the expectation of returns is above that indicated by normal risk premiums. The fund manager is chasing inventive ways to free up capital whilst maintaining control of the assets in order to keep up with investor's return expectations. My impression was, the expected returns were driving the fund manager, not the other way around.

What do I take from this? I would guess that all that money might get less return than expected (one day) - perhaps the returns associated with the real risk premium...

Cheers, Barracuda