Thursday, April 17, 2014

Fund Managers' Current Asset Allocation - April

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. In the past, after a massive overexposure, a washout low would be marked by an equity weighting under +10%.

In April, despite an 8% fall in Nasdaq and small caps, global equity allocations actually increased to +45% overweight.

In March, equity exposure appeared to fall substantially, but this was misleading. Allocations to Europe, the US and EMs were virtually unchanged. The exception was Japan, where fund managers halved their substantial exposure to a 12-month low. This accounted for all of the month over month decline in equity allocations in March. Japanese allocations fell further in April.

Emerging markets had been underperforming SPX over the past year. In the past month, EEM has strongly outperformed. In response, managers have increased their exposure to -13% underweight from -31% in March. This accounts for all of the increase in fund managers' global equity exposure in April.

In the world's largest equity market, the US, equity allocations were flat from March. Exposure is essentially neutral.

Europe has been the consensus long for 8 months in a row. Exposure decreased from March; however, at +30% overweight, Europe remains the favorite by more than 2:1 relative to the US or Japan.

Remarkably, although bonds have outperformed SPX so far in 2014, allocations to bonds actually decreased in April. Fund managers are still massively underweight.

Two-thirds of managers expect short term rates to increase. This is the most bullish managers have been on short rates since July 2011 (arrow). In the prior event, rates dropped from 1.8% to 0.5% over the next 12-months.

Overall, 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, utilities). Managers increased their exposure to banks, industrials and energy in April.

Given the strong underperformance of tech in the past month, managers' exposure to high-beta technology is, remarkably, the highest of all sectors (+1.0 standard deviations above the 10 year average). They have now been massively overweight tech for 5-months in a row; in the past past, that has not lasted more than about 6-months. Normally tech underperforms after it has been this strongly in favor for as many months as it has now.

Fund managers exposure to industrials rose to a 5-month high in April (+27% overweight). Exposure to banks rose to +17% overweight in April (+1.7 standard deviations above the 10 year average).

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.

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 (+4.6%): Cash balances declined to 4.6% (it had been between 4.4% and 4.8% 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 rise from +36% in March and equal to levels in February. 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 (-55%): A net -55% are now underweight bonds, a decrease from -53% in March even though bonds have outperformed. In November, it was the second lowest ever (-69%). For comparison, they were -38% underweight in May 2013. 
  4. Regions
    1. Europe (+30%): Europe is the most preferred region for the 8th month in a row. Managers are +30% overweight a huge increase from +3% overweight in July and -8% underweight in May and April 2013; it declined from +38% in March. It was +46% overweight in October, the highest weighting since June 2007.  
    2. Japan (+13%): Managers are +13% overweight Japan, a small decline from March. 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 (+12%): 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 +12% overweight in April. 
    4. EEM (-13%): Managers are -13% underweight EEM, an increase from March (-31%) which was 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 (-21%): Managers decreased their commodity exposure in April (from -18% underweight in March); they were -31% underweight in December, the third lowest on record. Low commodity exposure goes in hand with skepticism over EEM.
  6. Macro: 62% expect a stronger global economy over the next 12 months, unchanged from March (January was 75%, the highest reading in 3 years). This compares to just 40% in December 2012, on the eve of the current rally.