The BofA Merrill Lynch Fund Manager Survey found the number of managers who have shifted into an overweight cash position has risen 15 percentage points from 12 per cent in July to 27 per cent in August, suggesting investors are looking to take profits and buy into any potential corrections.
The spike in cash levels means it now accounts for an average of 5.1 per cent of global portfolios, up from 4.5 per cent a month ago. Both of BofA Merrill Lynch’s cash readings are now at their highest since June 2012.
The move into cash by an increasing number of the 224 respondents to the survey, who have a total $675bn of assets under management, suggests investors should take a contrarian position and buy into the market, according to BofA Merrill Lynch.
The monthly survey’s ‘cash rule’ says when the average cash balance rises above 4.5 per cent a contrarian ‘buy’ signal is generated for equities and when it falls below 3.5 per cent, a contrarian sell signal is generated.
Spiralling tension in the Middle East and between Ukraine and Russia was cited as the primary reason for the move into cash with 86 per cent of the respondents saying it was why they upped their cash weighting to an overweight.
The survey also found the proportion of asset allocators overweight in equities has plummeted by 17 percentage points in one month, to a net 44 per cent in August.
Global markets have had a stellar run since 2009, with performance since the autumn of 2012 being particularly strong.
Performance of indices over 3yrs
Source: FE Analytics
However, a more sideways market in 2014 has seen some question whether the rally has ended and is now susceptible to a shock such as the end of QE or a geo-political event.
Richard Scott, co-manager of the PFS Hawksmoor Distribution and Vanbrugh funds, has been raising cash levels of late but has very recently bought two new funds for income.
“The cash levels within our portfolios have been at an elevated level of about 9 per cent for about two months and it will remain so,” he said.
“The primary reason is that we have been taking profits in some areas that have done very well. One area in particular is UK smaller companies which has had spectacular run and really exceeded our expectations.”
“However, we have recently added to the Schroder European Alpha and JOHCM Japan fund to help with the income generation in the PFS Hawksmoor Distribution funds because cash isn’t giving us very much income.”
Richards says another reason was seeing a lack of opportunities elsewhere, particularly on the fixed income side.
He also anticipates the increased level of cash in the two funds to drive performance following a potential market correction.
The PFS Hawksmoor Distribution fund has returned 31.72 per cent over three years compared to a sector average of 20.12 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
Despite the higher levels of cash, the survey also found 56 per cent of the global panel expects the economy to strengthen in the year ahead.
However this represents a fall from 69 per cent in the previous June.
Also, the managers’ sentiment towards Europe has fallen significantly with the earnings outlook for the region suffering its highest monthly fall since the survey started.
A decline in sentiment to markets was also evident in the State Street Investor Confidence Index It fell to 114.7 in July, down 4.6 points from June’s revised reading of 119.3.
The decline was driven by a decrease in North American sentiment from 116.1 to 110.3 and a decrease in Asian sentiment to 92.1 from 96.2 in June.
European sentiment rose to 121.2, up from June’s revised reading of 113.7.
The survey measures investors’ confidence or risk appetite by analysing the buying and selling patterns of institutional investors.
The greater percentage of allocation to equities, the higher risk appetite or confidence.
A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets.
Jessica Donohue, senior managing director and head of research and advisory services for State Street Global Exchange, says valuation concerns in the US markets and rising geo-political risk have dampened sentiment, but North American confidence still remains relatively sanguine.
“Institutions appear to be in a wait-and-see mode this summer as they contemplate the future path of Federal Reserve monetary policy,” she said.
“Stronger growth metrics in Europe and the UK and well received ECB policy actions helped boost European confidence, which reached the strongest level since May of 2007.”
“Meanwhile, rising geo-political tensions may have weakened Asian investor sentiment. It will be interesting to see if continued growth in China and political reform in select Asian countries, including India and Indonesia, lead to stronger sentiment going forward.”
Several managers including the likes of Crispin Odey, Schroders’ Marcus Brookes, Troy’s Sebastian Lyon, Investec’s Alastair Mundy and GMO’s Jeremy Grantham have all been steady upping their cash weighting over the past year.
