Tuesday, November 18, 2014

Fund Managers' Current Asset Allocation - November

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.

Here's a brief recap of the past several months:

In July, fund manager equity allocations reached a bullish extreme. At +61% overweight, it was the second highest since the survey began in 2001, a clear risk to near-term equity performance (post).

By August, the Euro 350 dropped 8% and SPX dropped 5%. In response, equity allocations fell and cash shot up to 5.1%, a high level associated with lows in equities (post).

In September, equities in the US hit new highs; Europe rallied, but fell short of new highs. Fund managers raised their global equity exposure and reduced their cash (post).

In October, equities worldwide fell more than 7-10%; most markets were, at least briefly, negative for 2014.  Bond yields made new lows. Fund managers raised their cash levels back to 4.9%. Equity allocations were dropped to their lowest levels in 2 years. On further weakness, a washout low would be set up (post).

Now, the strong recovery in equity prices (to new bull market highs in the US and Japan) has pushed cash levels down a bit and equity allocations up to near their prior highs. That's especially true for US and Japan equity exposure.

Let's review the highlights from November.

Fund managers have reduced their cash levels to 4.7%. This is still relatively high on a historical basis but note that cash levels haven't been below 4.5% in the past year. We consider current levels to be neutral. Instances are very low, but over 5% represents bearish sentiment: this is where bottoms in equities have formed in the past.  

Global equity exposure is now +46% overweight, a 12 percentage point increase since last month. Current allocations are at the same level as in June and September of this year, both of which preceded equity weakness. We consider current levels to be at the high end of neutral (over +50% is bearish).

As we have continually noted, what has been 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 the past, after overexposure like that seen in the past 2 years, a washout low would be marked by an equity weighting under +15-20% (green shading). By that measure, equities are over owned.

The biggest surprise in September was that fund managers dropped their US equity exposure to just +1% overweight. Given how strongly the US has outperformed the rest of the world in the past several years, that exposure was surprisingly low. The US was under owned.

In November, US exposure jumped to a 15 month high of +25% overweight. Managers' allocations to the US are now 1.4 standard deviations above the long term mean. . This is where US outperformance has ceased in the past. BAML considers current levels to be contrarian short on a relative performance basis; we agree.

Europe had been the consensus long for 11 months in a row. Exposure in June was +43% overweight, the second highest weighting since June 2007. Since then, the region has strongly underperformed. Allocations in November were +8% overweight, near its long term mean.  It's not a washout low on a historical basis. Still, allocations to Europe are now just 1/4 of those to the US.

Managers now have their largest equity exposure in Japan. Allocations haven't been this high since April 2006. It looks extreme. BAML considers this to be a contrarian short.

Managers were -31% underweight EEM in March. This was a strong contrarian buy. In the ensuing months, the region strongly outperformed. In August, allocations increased to +17% overweight, the highest in 17 months. As we noted then, the fat pitch had passed. Exposure is now back to neutral. This is where bottoms form, but, in the past, it has taken more than one month for a solid low to be put in.

Remarkably, although US bonds have outperformed SPX so far in 2014, fund managers are still -52% underweight. In July, exposure fell to their lowest in more than 6 months. It's not much higher now. Bonds continue to be the most hated asset class and this, in large part, explains why cash balances have not been lower that 4.5% in the past year. For comparison, managers were -38% underweight in May 2013 before the large fall in bond prices. There is room for bond exposure to rise further.

Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (technology, discretionary, banks) and underweight defensives (telecom, staples). However, utilities are now overweight. The largest underweight is energy. These are contrarian investments.

That is equally true in the US. Tech is the most favored sector, followed by pharma and banks. This has been the case for many months. Utilities, staples, telecoms (defensives) and energy remain very underweighted. 

Since the September 19 high, utilities and staples, two of the least liked sectors, have strongly outperformed. Among cyclicals, only tech and industrials have outperformed. Energy has been the obvious loser. 

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 that year. In comparison, they were 20% underweight Japan in December 2012 and it was the best equity market in 2013.  

Survey details are below.
  1. Cash (+4.7%): Cash balances fell to 4.7% from 4.9% in October. 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 (+46%): A net +46% are overweight global equities, up from +34% in October.  In July it was +61%, the second highest since the survey began in 2001. Over +50% is bearish. A washout low (bullish) would be under +15-20%. More on this indicator here
  3. Bonds (-52%): A net -52% are now underweight bonds, an increase from -64% in July, the lowest weighting in more than 6 months. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices. 
  4. Regions
    1. US (+25%): The current weighting is a 15 month high, up from just +1% in September. Managers' allocations to the US are 1.4 standard deviations above the long term mean. They had been +30% overweight in August 2013 (the third highest US weighting ever). 
    2. Europe (+8%): Before August, Europe had been investors' most most preferred region for 11 months in a row. The +46% overweight in October 2013 was the region's highest weighting since June 2007.  October exposure (+4% overweight) was a 15 month low.
    3. Japan (+45%): Managers are +45% overweight Japan, the highest since April 2006. Funds were -20% underweight in December 2012 when the Japanese rally began. 
    4. EEM (0%): Managers increased their EEM exposure to neutral from-5% underweight in October. 
  5. Commodities (-18%): Managers commodity exposure is -18% underweight. With the exception of August, it has been less than -15% since early 2013. Low commodity exposure goes in hand with low sentiment towards EEM.
  6. Macro: 47% expect a stronger global economy over the next 12 months, an increase from 32% in October. January was 75%, the highest reading in 3 years. This compares to a net -20% in mid-2012, at the start of the current rally. Only 9% expect a recession in 2015.

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