Wednesday, February 18, 2015

Fund Managers' Current Asset Allocation - February

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.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.

To this end, fund managers became very bullish in July, September, November and December, and stocks have subsequently sold off each time. Contrariwise, there were some relative bearish extremes reached in August and October to set up new rallies. We did a recap of this pattern in December (post).

Summary: In February, fund managers increased their global allocation to equities to among the highest since the bull market began. Most of the increase was to Eurozone equities, which now has the second highest allocation in the survey's history. US equities fell out of favor, a set up in which they should outperperform on a relative basis.

Let's review the highlights.

Fund managers increased their cash levels slightly to 4.7%. While this is relatively high on a historical basis, note that cash levels haven't been much below 4.5% since 2013. We consider current levels to be neutral. 

Fund managers are +57% overweight equities, the fourth highest since the bull market began six years ago. The only other time equity allocations have been this great in the past year was in July; equities fell later that month. We consider current levels to be bearish. Similar instances are highlighted in green.

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).

US exposure dropped from +24% to just +6% overweight. Over +20% has been over-owned in the past. As we said last month, this is where the US equities underperform ex-US markets, and that turned out to be the case. On a relative basis, US equities are now neutral (just above its long term average). US equities should outperform those in Europe and Japan (see below).

Eurozone exposure jumped massively to +56% overweight from +20%. This is the second highest exposure to Europe in the survey's history. Judging from the experience in 2006, European equities are likely to underperform.

Allocations to Japan stayed near the highs of the last few months (+35% overweight). Allocations the past four months haven't been this high since April 2006. It looks extreme. Managers expect Japan to benefit from central bank liquidity.

Emerging markets are the only region where managers are underweight (-1%, up from -13% last month). This is where bottoms form, but, in the past, it has often (but not always) taken more than one month for a solid low to be put in.

Remarkably, although US bonds outperformed SPX throughout 2014, fund managers are -55% underweight. Bonds continue to be the most underweighted asset class and this, in large part, explains why cash balances have not been lower that 4.5% in more than a year. For comparison, managers were -38% underweight in May 2013 before the large fall in bond prices.

Globally, managers are not just overweight equity and underweight bonds, they are overweight the highest beta equities (technology, discretionary, banks). The largest underweights are materials and energy.

The global overweight in discretionary stocks is the highest since the survey began.

In the US, pharma (biotech) is the most favored sector, followed by banks and tech. This has been the case for many months. Utilities, staples, telecoms (defensives) and energy remain underweighted. 

Survey details are below.
  1. Cash (+4.7%): Cash balances rose slightly to 4.7% from 4.5% in January. 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 (+57%): A net +57% are overweight global equities, a 7 month high.  This is the 4th highest level since the bull market began. Over +50% is bearish. A washout low (bullish) would be under +15-20%. More on this indicator here
  3. Bonds (-55%): A net -55% are now underweight bonds, a small decline from -53% in January. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices. 
  4. Regions
    1. US (+6%): Exposure to the US sank substantially to +6% overweight from +24% in January.  
    2. Europe (+56%): Exposure to Europe jumped massively to +56% overweight, the second highest in the survey's history. 
    3. Japan (+35%): Managers are +35% overweight Japan, unchanged from last month. Funds were -20% underweight in December 2012 when the Japanese rally began. 
    4. EEM (-1%): Managers increased their EEM exposure to -1% underweight from -13% in January. 
  5. Commodities (-20%): Managers commodity exposure remained low at -20% 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: 51% expect a stronger global economy over the next 12 months, unchanged from January. January 2014 was 75%, the highest reading in 3 years. This compares to a net -20% in mid-2012, at the start of the current rally. 

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