Wednesday, March 19, 2014

Fund Managers' Current Asset Allocation - March

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.

What has been particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013 and so far in 2014). This is longer than any period during the 2003-07 bull market (yellow shading). In September, exposure to global equities was the second highest since the survey began in 2001.

On the surface, equity exposure fell substantially in March, but this is misleading. Allocations to Europe, the US and EMs were virtually unchanged. The exception is Japan, where fund managers halved their substantial exposure to a 12-month low (Japan has recently been the second most overweighted market). This accounts for all of the month over month decline in equity allocations in March. 

In the world's largest equity market, the US, equity allocations increased in March. Exposure is essentially neutral.

Europe has been the consensus long for 7 months in a row. Exposure increased slightly and is over a standard deviation above average.

Had there been an overall change in fund manager risk perceptions, allocations to fixed income would have increased dramatically. Instead, fund managers are still massively underweight. US treasuries have outperformed SPX so far in 2014.

The conclusion, then, is that fund managers remain strongly bullish.

Moreover, they 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.

Another sign that fund managers view risk as low is this: the proportion of fund managers that believe large caps will outperform more speculative small caps is at the lowest level since 2006. In comparison, the yellow shading indicates their views at recent SPX lows. 

Their current exposure to high-beta technology is the highest of all sectors (+1.1 standard deviations above 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. But normally tech underperforms after it has been this strongly in favor for as many months as it has now.

In the past, when managers have been this overweight growth sectors like tech and 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. While current (bullish) market psychology is biased towards high beta, lower beta is likely to outperform in the months ahead.

Emerging markets have been underperforming SPX for over 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 (about -2.7 standard deviations below the 10 year average).

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 are unchanged at 4.8% (it had 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 (+36%): A net +36% are overweight global equities, a drop from +45% in February and +55% in January; all of this is due to a drop in Japan. This is a 15-month low, ending the longest streak of very high allocations since the survey began. After reaching the second highest equity weighting ever in September (+60%), a washout low would be under +10%. More on this indicator here
  3. Bonds (-53%): A net -53% 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 2013. 
  4. Regions
    1. Europe (+38%): Europe is the most preferred region for the 7th month in a row. Managers are +38% overweight (+1.1 standard deviation above 10 year average)  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 (+16%): Managers are +16% overweight Japan. This is the main reason overall equity allocations fell this month. It was +30% in February and +34% in December, the highest weighting since May 2006. Funds were -20% underweight in December 2012 when the Japanese rally began. 
    3. US (+13%): Managers are 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 +13% overweight in March. 
    4. EEM (-31%): Managers are -31% underweight EEM (-2.7 standard deviation below 10 year average), a new low 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 (-18%): 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 -1.3 standard deviations below its 8 year average.
  6. Macro: 62% expect a stronger global economy over the next 12 months, up from 56% last month (January was 75%, the highest reading in 3 years). This compares to just 40% in December 2012, on the eve of the current rally.