Fund Managers' Current Asset Allocation - February

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.

Overall, while fund managers remain very bullish on risk, their enthusiasm moderated somewhat in February. In September, exposure to global equities was the second highest since the survey began in 2001. It dropped this month to levels near those in May before SPX fell to its June low; it is still nowhere near the lows seen in 2010, 2011 or 2012. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period during the 2003-07 bull market.

Allocations to fixed income increased last month but fund managers are still massively underweight, and the spread between allocations to equities and income (110 percentage points) remains among the widest ever. Treasuries have outperformed SPX so far in 2014.

Fund managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (tech, banks, discretionary) and underweight defensives (telecom, staples, pharma) as well as cash.

Their current exposure to high-beta technology is the highest of all sectors (+1.2 standard deviations above the 10 year average), while their exposure to low-beta staples is the lowest since 2003 (-1.9 standard deviations below the 10 year average). If there is a silver lining, exposure to tech has stayed high as long as 6 months (and as short as one month) in a row in the past.

Their exposure to banks increased massively last month to the highest ever, +2.4 standard deviations above the 10 year average. US banks have barely outperformed SPX so far in 2014.

In the past, when managers have been this overweight growth sectors like banks, those sectors have underperformed until their exposure has been reduced. Conversely, when their exposure to safer, income producing sectors like consumer staples has been this low, those sectors have outperformed. The current spread between those two (56 percentage points) is the widest ever. So, while current (bullish) market psychology is biased towards high beta, lower beta is likely to outperform in the months ahead.

Managers have their largest overweight position in Eurozone equities. Exposure to Japanese equities is among the highest since 2006.

Emerging markets have been underperforming SPX for a year. There was a two month rally over the summer that began when exposure was the lowest since the survey began in 2001. That rally faded after managers became 1% overweight in November. Funds are now back to a record low exposure -2.7 standard deviations below the 10 year average. Despite this, EEM has been a parity performer to SPX over the past 4-weeks.

Fund managers' exposure to energy is the lowest ever (-2.8 standard deviations below the 10 year average). US energy (XLE) has been a parity performer to SPX over the past 5-weeks.

You can see from the data that it should mostly be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of 2013, and it was the worst performer of the year. In comparison, they were 20% underweight Japan in December 2012 and it was the best equity market in 2013.  Now, the big overweight is in Europe, banks and tech and the big underweight is in emerging markets, staples and energy.

Survey details are below.

1. Cash (+4.8%): Cash balances increased to 4.8% (it has been between 4.4% and 4.6% since July 2013). For comparison, it was 3.8% in January and February 2013 when the rally was getting started. Typical range is 3.5-5%. BAML has a 4.5% contrarian buy level but we consider over 5% to be a better signal. More on this indicator here. 
2. Equities (+45%): A net 45% are overweight global equities, a drop from +55% in January. This is still high: it was +41% in May 2013 before the market corrected into the June low. It reached the second highest equity weighting ever in September (+60%). In comparison, it was +35% in December 2012 when the rally was still young. More on this indicator here. 
3. Bonds (-55%): A net 55% are now underweight bonds. It has increased every month since November, when it was the second lowest ever (-69%). For comparison, they were -38% underweight in May. 
4. Regions: 
1. Europe (+37%): Europe is the most preferred region for the 6th month in a row. Managers are 37% overweight, a huge increase from 3% overweight in July and 8% underweight in May and April 2013. It was 46% overweight in October, the highest weighting since June 2007.  
2. Japan (+30%): Managers are 30% overweight Japan. It was 34% in December, the highest weighting since May 2006. Funds were 20% underweight in December 2012 when the Japanese rally began. 
3. US (+11%): Managers were neutral on the US in October, a big drop from 30% overweight in August (the third highest US weighting ever), but this increased to 7% overweight in November and December and now again to +11% overweight in February. 
4. EEM (-29%): Managers are 29% underweight EEM (-2.7 standard deviation below 10 year average), the lowest since the survey began in 2001.  It had increased two months in a row (10% underweight in October, 1% overweight in November) before falling back to 15% underweight in January. EM had been the most favored region (overweight 43%) in February 2013. 
5. Commodities (-23%): Managers are less underweight commodities, increasing from -31% underweight in December, the third lowest on record. Low commodity exposure goes in hand with skepticism over EEM. Current weighting is 1.6 standard deviations below its 8 year average.
6. Macro: 56% expect a stronger global economy over the next 12 months, down from 75% last month (the highest reading in 3 years). This compares to just 40% in December 2012, on the eve of the current rally.