Tuesday, March 17, 2015

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 $600b 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 March, fund managers increased their global allocation to equities to the third highest since the bull market began. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month. Most of the increase was to Eurozone equities, which now has the highest allocation in the survey's history. US equities fell significantly out of favor, to a 7 year low, a set up in which they should outperperform on a relative basis. EEM also fell further out of favor.

Let's review the highlights.

Fund managers decreased their cash levels slightly to 4.6%. 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 +58% overweight equities, the third highest since the bull market began six years ago. The only other time equity allocations have been higher in the past year was in July; equities fell later that month. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month.  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% overweight in January to -19% underweight in March, the lowest since January 2008. Over +20% has been over-owned in the past; as we said in January, that is when US equities underperform ex-US markets, and that has turned out to be the case. US equities are now under-owned. US equities should outperform those in Europe and Japan (see below).

Eurozone exposure jumped massively to +60% overweight. This is the 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 (+40% overweight). Allocations the past five months haven't been this high since April 2006. It looks extreme. Managers expect Japan to benefit from central bank liquidity.

Fund managers are -11% underweight emerging markets. 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.

Fund managers are -54% underweight bonds. 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 two years. 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 underweight is energy.

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

The global overweight in technology is the highest since January 2014. Similar cases of being overweight are highlighted in green; this is when the sector usually underperforms.

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

Since 2006, fund managers surveyed by BAML has been very good at determining when the dollar is overvalued. In March, they viewed it as overvalued for the first since 2009. Similar cases are highlighted in green.

Survey details are below.
  1. Cash (+4.6%): Cash balances fell slightly to 4.6% from 4.7% in February. 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 (+58%): A net +58% are overweight global equities, an 8 month high.  This is the 3rd 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 (-54%): A net -54% are now underweight bonds, a small increase from -55% in February. For comparison, they were -38% underweight in May 2013 before the large fall in bond prices. 
  4. Regions
    1. US (-19%): Exposure to the US sank substantially to -19% underweight from +24% overweight in January.  This is the lowest since January 2008.
    2. Europe (+60%): Exposure to Europe jumped massively to +60% overweight, the highest in the survey's history. 
    3. Japan (+40%): Managers are +40% overweight Japan, up for +35% from last month. Funds were -20% underweight in December 2012 when the Japanese rally began. 
    4. EEM (-11%): Managers decreased their EEM exposure to -11% underweight from -1% in February. This is the 2nd lowest in the past 18 months. 
  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: 62% expect a stronger global economy over the next 12 months, an increase from 52% in February. 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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