Tuesday, August 13, 2013

Fund Managers' Current Asset Allocation - August

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. These managers oversee a combined $700b in assets.

Overall, fund managers are extremely bullish on risk. In August, they further reduced their exposure to bonds (57% underweight) and increased their exposure to equities (56% overweight). Fund managers equity weighting is now in the top 5% since 2007.

Managers are now overweight the US equities by 30%, an increase of 5 percentage points in the past two months. They were 3% underweight the US in January, for comparison. Managers increased Europe to 17% overweight, the highest in 5 and 1/2 years, from just 3% in July. They decreased Japan to 19% overweight from 27% last month. Meanwhile, emerging markets are now 19% underweight, the lowest since the survey began in 2001.

You can see from the data that it should be looked at from a contrarian perspective. Fund managers were overweight EEM more than any other market at the start of the year, and it has been the worst performer so far. They are now bearish EEM, so keep it on your radar. In comparison, they were 20% underweight Japan in December and it has been the best equity market in 2013.

The US is now the largest consensus long. In the history of the survey, the current weighting is the third highest. This is consistent with the AAII asset allocation survey and fund flow data showing July to be the largest inflow into equity funds and ETFs ever.

Survey details are below.
  1. Cash (4.5%): Cash balances declined to 4.5% from 4.6% in July (vs 3.8% in January and February 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. BAML Chief Investment Strategist Hartnett says cash is high due to bond weightings being so low. More on this indicator here.
  2. Equities (+56%): A net 56% are overweight global equities, a 13 percentage point increase from May. This is among the top five highest equity weightings since the survey began in April 2001. In comparison, it was 35% in December 2012 when the rally was still young. More on this indicator here and see chart below.
  3. Bonds (-57%): A net 57% are now underweight bonds, an increase from 38% underweight in May. This is the lowest bond weighting in 28 months. Only 3% expect long term rates to be lower over the next 12 months. 
  4. Regions:
    1. US (+30%): Managers are 30% overweight the US (an increase from 29% in July, 25% in June, 20% in May and April, 14% in March and 3% underweight in January). This is the third highest weighting ever. 
    2. Japan (+19%): Managers are 19% overweight Japan, an increase from 17% in June but a decline from 29% in July. Funds were 20% underweight in December when the Japanese rally began. 
    3. Europe (+17%): Managers are 17% overweight, an huge increase from 3% overweight in July and 8% underweight in May and April. This is the highest weighting since January 2008. 88% of managers expect European macro to improve over the next 12 months, the highest confidence in 9 years.
    4. EEM (-19%): EEM had been the most favored region (overweight 43% in February) but this fell to +3% in May, and further to 9% underweight in June and now 19% underweight in August, the lowest since the survey began in 2001. For China in particular, 32% do not expect its growth to strengthen in the next 12 months; for comparison, in December, 67% expected growth to strengthen in the next 12 months. 
  5. Commodities (-23%): Commodities were a record 32% underweight in June (vs 1% underweight in February), but this was reduced to 23% underweight in August. The commodity weighting goes in hand with skepticism over China and EEM.
  6. Currencies: 75% expect the dollar to rise in value over then next 12 months. This is down slightly from 83% in July, which was the largest bullish position on the dollar since the survey began. 
  7. Macro: 72% expect a stronger global economy over the next 12 months, up 24 percentage points since May. This is the highest since December 2009.
A net 56% of fund managers are overweight global equities. Over 50% represents a high level of bullishness. Since 2007, SPX has not moved appreciably higher without moving lower first. Charts via Short Side of Long.

Managers are 30% overweight the US. Over 30% has been the historical peak weighting (mid 2008, late 2010 and early 2012). In comparison, EEM is a record underweight.

On a relative basis, funds are now highly exposed to equities, especially UK and UK equities, and cyclicals; they are underexposed to cash, bonds, commodities and EEM equities.

A net 57% are now underweight bonds, an increase from 38% underweight in May. This is the lowest bond weighting in 28 months.