Tuesday, September 17, 2013

Fund Managers' Current Asset Allocation - September

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 positioned in various asset classes. These managers oversee a combined $700b in assets.

Overall, fund managers are extremely bullish on risk: exposure to global equities (60% overweight) is at the second highest since the survey began in 2001. At the same time, exposure to fixed income (68% underweight) is at the second lowest ever.

The upshot is this: in the past 4 months, both All World Ex-US Index and the SPX are net flat, but fund managers have increased their equity overweight by 17 percentage points. Since 2007, equities have not moved appreciably higher without moving lower first when funds are extremely overweight equities (dashed line is the current weighting).

Managers now have their largest overweight position in Eurozone equities, more than doubling their weight in the past month. US equities had been the preferred region the past several months, but exposure was reduced due to tapering fears. In the past, a large shift out of the US has coincided with US equity underperformance going forward (yellow shading). Moreover, in the past 3 years, it has also coincided with poor absolute (mid-year) performance in SPX as well.

Interestingly, exposure to emerging markets increased for the first time since February; in August, they were the lowest since the survey began in 2001. Take note: EEM has been outperforming SPX over the past 3 months while managers are still 18% underweight.

Funds are positioned for growth, being long not just equities but also cyclical sectors (discretionary, industrials and banks). Emerging markets in addition to bonds (and dividend paying equities, like staples and telecoms) are at a historic underweighting. Weightings in industrials is at a 10 year high while staples are at a 7 year low.

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 the year, and it was the worst performer until recently. They remain bearish EEM as it starts to outperform. In comparison, they were 20% underweight Japan in December and it was the best equity market by far through May.

Survey details are below.

  1. Cash (4.6%): Cash balances remained 4.6% (4.5% in August; 4.6% in July).  For comparison, it was 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: "Investor cash levels remain high because the fear of bond markets is greater than the appetite in equity markets." More on this indicator here.
  2. Equities (+60%): A net 60% are overweight global equities. It has been up every month since May.  This is the second highest equity weighting since the survey began in April 2001 (the only higher one was February 2011).  In comparison, it was 35% in December 2012 when the rally was still young. More on this indicator here.
  3. Bonds (-68%): A net 68% are now underweight bonds, an increase from 38% underweight in May and 57% in August. This is the lowest bond weighting since April 2006 and the second lowest since the survey began. 3 of 4 managers expect long term rates to be higher over the next 12 months. 
  4. Regions:
    1. Europe (+36%): Europe is the most preferred region for the first time in 6 years. Managers are 36% overweight, a huge increase from 3% overweight in July and 8% underweight in May and April. This is the highest weighting since September 2007. Allocations to the UK (+12%) are the highest in 11 years.
    2. Japan (+22%): Managers are 22% 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. US (+9%): Managers are 9% overweight the US, a big drop from 30% in August and the lowest since February of this year. August was the third highest US weighting ever. BAML: "Tapering fears have spurred the rotation from US to EZ and the UK." 
    4. EEM (-18%): 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 19% underweight in August, the lowest since the survey began in 2001. September was the first increase since February. 
  5. Commodities (-16%): Commodities were a record 32% underweight in June (vs 1% underweight in February), but this was reduced to 16% underweight in September. The commodity weighting goes in hand with skepticism over China and EEM. Take note: like EEM, sentiment is starting to improve.  
  6. Macro: 69% expect a stronger global economy over the next 12 months, up 21 percentage points since May. BAML: "Investors are positioned for growth."