Tuesday, May 13, 2014

Fund Managers' Current Asset Allocation - May

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 since the start of 2013). 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.

That has started to change over the past 3 months. Exposure is now +37% overweight, unchanged from March but substantially lower than at the start of the year.

If there is a sliver lining, it is that current equity exposure is similar to that at the 2005 low, but that is the exception. In the past, after massive overexposure like that seen in the past year, a washout low would be marked by an equity weighting under +15%. By that measure, equities are still over owned. 

Most of the recent decline in equity exposure is a result of Japan falling from +34% to just +7% overweight in the past 5 months.  The other regions have not changed much since January. 

In the world's largest equity market, the US, equity allocations dropped to +6% overweight in May. Exposure is essentially neutral. Given how strongly the US has outperformed the rest of the world in the past several years, exposure is surprisingly low. It is not over owned until weightings are +30%. 

Europe has been the consensus long for 9 months in a row. Exposure increased in May; at +36% overweight, Europe remains the favorite by more than 5:1 relative to the US or Japan. European equities are near all time highs as a result.

Emerging markets had been underperforming SPX over the past year. In the past two months, however, EEM has strongly outperformed. In response, managers have increased their exposure to -11% underweight from -31% in March. In the bigger picture, managers are still massively underweight.

Remarkably, although US bonds have outperformed SPX so far in 2014, fund managers are still hugely underweight. If there is a hated asset class, it's not equities, it's bonds. 79% of fund managers believe bond yields will rise over the next 12 months.

One of the headlines from the survey is that fund managers' cash allocations have increased to 5% for the first time since June 2012. In the past, this has marked a low in equity prices. But, the notable feature today is that managers have high cash and high equity exposure. At every prior low, high cash (top panel) has been accompanied by low equity exposure (bottom panel). It is very hard, therefore, to say that managers are currently signaling a contrarian buy (chart from Short Side of Long).

Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (tech, banks, discretionary) and underweight defensives (telecom, staples).

That is equally true in the US, where tech is the most favored sector by far and utilities are still very underweighted. One recent change has been a reduction in banks to near neutral and discretionary to underweight.

We have been highlighting managers' prolonged overweight of technology the past several months, saying that tech normally underperforms after it has been strongly in favor for as many months as it has been. The fall in NDX since March now confirms this warning. Managers are still +30% overweight. The good news is this is similar to the lows in 2010 and 2011; the bad news is the lows in 2013 were when tech was less than +20% overweight.

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 past 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 and tech and the big underweight is in emerging markets.

Survey details are below.
  1. Cash (+5.0%): Cash balances increased from 4.6% to 5.0% (it had been between 4.4% and 4.8% since July 2013). 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 (+37%): A net +37% are overweight global equities. It was +45% in April but +36% in March. After reaching the second highest equity weighting ever in September (+60%), a washout low would be under +15%. More on this indicator here
  3. Bonds (-55%): A net -55% are now underweight bonds, unchanged from April and more or less unchanged the last 4 months. In November, it was the second lowest ever (-69%). For comparison, they were -38% underweight in May 2013. 
  4. Regions
    1. Europe (+36%): Europe is the most preferred region for the 9th month in a row. Managers are +36% overweight, a huge increase from +3% overweight in July 2013 and -8% underweight in May and April 2013. It was +46% overweight in October, the highest weighting since June 2007.  
    2. Japan (+7%): Managers are +7% overweight Japan, a continued decline from +34% in December, which was the highest weighting since May 2006. Funds were -20% underweight in December 2012 when the Japanese rally began. 
    3. US (+6%): Managers dropped their US weighting to +6% from +12% in April. They had been +30% overweight in August 2013 (the third highest US weighting ever). 
    4. EEM (-11%): Managers are -11% underweight EEM, the second month of increase from March's -31% underweight, which was a new low since the survey began in 2001.  EEM had been the most favored region (overweight +43%) in February 2013. 
  5. Commodities (-18%): Managers commodity exposure remains largely unchanged the past several months. They were -31% underweight in December, the third lowest on record. Low commodity exposure goes in hand with skepticism over EEM.
  6. Macro: 66% expect a stronger global economy over the next 12 months, an increase from 62% in March and April. January was 75%, the highest reading in 3 years. This compares to just 40% in December 2012, on the eve of the current rally.