Wednesday, November 13, 2013

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 positioned in various asset classes. These managers oversee a combined $700b in assets.

There was very little change since October. Overall, fund managers remain very bullish on risk. In September, exposure to global equities was the second highest since the survey began in 2001; it is only marginally lower now. What is particularly remarkable is how long managers have been highly overweight equities (virtually all of 2013). This is longer than any period between 2003-07.

Fund managers are so confident in equities, that they have very low protection against a sharp fall, similar to levels in January and April 2010, February 2011 and earlier this year.

Meanwhile, exposure to fixed income is now tied with April 2006 (arrow) for the lowest ever.

Fund managers are not just overweight equity and underweight bonds, they are overweight the highest beta equity (tech, banks, discretionary) and underweight defensives (telecom, staples, pharma) as well as cash. For example, their current exposure to industrials is the fifth highest on record and 1.6 standard deviation above its 10 year average.

In the past, when managers have been this overweight growth sectors like industrials, 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. So, while current (bullish) market psychology is biased towards high beta, lower beta is likely to outperform in the months ahead.

Similarly, fund managers view higher beta small cap as far preferable to lower beta large caps. The contrarian trade is to go overweight large caps.

Managers have their largest overweight position in Eurozone equities, up more than 170% since August. US equities had been the preferred region the past several months, but exposure was reduced first due to taper fears and then debt ceiling fears.

Emerging markets had been outperforming SPX over the past several months while managers were still 10% underweight. Exposure to emerging markets in August, when the rally was still getting started, was the lowest since the survey began in 2001. Performance dropped to parity again in November with fund managers still just 1% overweight. This is still 1.2 standard deviation below the 10-year average.

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 the year, and it was the worst performer until August. In comparison, they were 20% underweight Japan in December and it was the best equity market by far through May. Now, the big overweight is in Europe.

Survey details are below.
  1. Cash (+4.6%): Cash balances remained 4.6% (4.4% in October; 4.5% in August; 4.6% in July and September).  For comparison, it was 3.8% in January and February 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. BAML Chief Investment Strategist Hartnett says: "Aversion to fixed income explains still elevated cash levels." More on this indicator here.
  2. Equities (+52%): A net 52% are overweight global equities, which is 1 standard deviation above the 10 year average. It had been up every month since May, but, after reaching the second highest equity weighting ever in September, it unsurprisingly declined in October to 49%.  November is a slight increase. In comparison, it was 35% in December 2012 when the rally was still young. More on this indicator here.
  3. Bonds (-69%): A net 69% are now underweight bonds, which is 1.5 standard deviations below the 10 year average. This is tied with April 2006 for the lowest reading ever. For comparison, they were 38% underweight in May. 
  4. Regions:
    1. Europe (+42%): Europe is the most preferred region. Managers are 42% overweight, a huge increase from 3% overweight in July and 8% underweight in May and April. It was 46% overweight in October, the highest weighting since June 2007. Said BAML last month: "This is an extreme overweight."
    2. Japan (+24%): Managers are 24% overweight Japan, a decline from 30% overweight in October. Funds were 20% underweight in December when the Japanese rally began. 
    3. US (+7%): Managers were neutral on the US in October, a big drop from 30% overweight in August, but this increased to 7% overweight in November. August was the third highest US weighting ever. BAML: "68% of investors think US stocks are already richly valued." 
    4. EEM (+1%): EEM had been the most favored region (overweight 43% in February) but this fell to +3% in May, and further to 9% underweight in June and 19% underweight in August, the lowest since the survey began in 2001. It has now increased two months in a row (it was 10% underweight in October). Even so, the current level is .2 standard deviations below the 10 year average.
  5. Commodities (-24%): Commodities were a record 32% underweight in June (vs 1% underweight in February), but this was reduced to 16% underweight in September. The current 24% underweight is among the worst on record and goes in hand with skepticism over EEM.  It was 28% underweight last month.
  6. Macro: More than 60% expect a stronger global economy over the next 12 months.