Fund Managers' Asset Allocation, April Report: Long Equities
Urban Carmel | Apr 15, 2015 12:16AM ET
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 April, fund managers maintained their global allocation to equities at one of the highest levels since the bull market began. It has been 1 standard deviation over the long term mean for three months in a row. Under similar circumstances in the past, long equities has had a poor risk/reward profile over the next month or so. Eurozone and Japanese equities are both 1.3 standard deviations overweight. US and emerging markets are out of favor and are contrarian longs.
Let's review the highlights.
Fund managers maintained their cash levels at 4.6%. While this is relatively high on a historical basis, note that cash levels haven't been much below 4.5% since early 2013. We consider current levels to be neutral.
Fund managers are +54% overweight equities, down slightly from +58% in March which was the third highest since the bull market began six years ago. Their equity exposure has been 1 standard deviation over the long term mean for three months in a row for the first time in the survey's history. 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.
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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 was -12% underweight in April, a small increase from -19% underweight in March, which was the lowest since January 2008. US equities are under-owned and should outperform those in Europe and Japan (see below).
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- US (-12%): Exposure to the US rose to -12% underweight from -19% last month, the lowest since January 2008. For comparison, it was +24% overweight in January.
- Europe (+46%): Exposure to Europe fell to +46% overweight, from +60% overweight in March, the highest in the survey's history.
- Japan (+38%): Managers are +38% overweight Japan, down from +40% from last month. Funds were -20% underweight in December 2012 when the Japanese rally began.
- EEM (-18%): Managers further decreased their EEM exposure to -18% underweight from -11% in March. This is the lowest in the past two years.
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