Fund managers appear to be positioning themselves for a “summer of shocks”, a closely watched survey suggests, after asset allocators across the globe reduced risk in their portfolios, maintained elevated cash levels and sold out of key areas of the market. 
The latest Fund Manager Survey by Bank of America Merrill Lynch (BofA ML) found that the average cash balance stands at 5.5 per cent. Although this is only a marginal rise on the 5.4 per cent reported in April’s survey, it remains high when compared with history.
Furthermore, just 12 per cent of the 168 fund managers polled (who run a combined $505bn of assets under management) say they are taking higher than normal risk within their portfolios.
Michael Hartnett, chief investment strategist at BofA ML, said: “Although global growth expectations rose slightly from the previous month, investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China and quantitative failure.”
Average cash balances of global asset allocators
Source: BofA ML Fund Manager Survey
Some 58 per cent of the fund managers surveyed say they are now bearish towards equities on a 12-month view, a record low for the survey. What’s more, the allocation to equities has fallen from a net 9 per cent overweight to a net 6 per cent and 89 per cent are saying stocks look overvalued.
Managers also said they want to invest cash into bonds in any pullbacks. They remain underweight fixed income with the average allocation being a net 41 per cent underweight towards fixed income.
This bearish sentiment comes despite more asset allocators saying global economic growth is likely to strength over the coming 12 months. The balance of those positive on the economic outlook has climbed from 10 per cent to 15 per cent, although this still remains below the readings of 50 to 60 per cent seen in early 2015.
While uncertainty over the health of the global economy, not all investors believe the appropriate response is to flee to cash. In its latest update, the team at Whitechurch Securities concedes that investor sentiment is likely to be “fickle” over the summer months but cautioned against pulling out of the market.
“Markets are broadly where they started the year and we see no fundamental reasons to be retreating to cash over the summer holidays. We will leave that call for those who believe they are good at gambling on short-term sentiment,” it said.
“Overall our central case remains that although global growth will be sluggish, we expect monetary policies will be accommodative in combatting the threat of recession. In addition, we expect to see an increase in fiscal stimulus with spend on infrastructure being a global investment theme that we will look to exploit.”
“There remain a number of uncertainties, not least the strength of the US and Chinese economies and the policy measures they employ. Although, we don’t believe that hiding in cash is a strategy to pursue, it is important to have a well-diversified portfolio across different regions and asset classes combined with ‘insurance’ positions to cover different scenarios.”
What do fund managers consider the biggest tail risk?
Source: BofA ML Fund Manager Survey
The BofA ML Fund Manager Survey found that there are more risks on managers’ radar. The UK’s 23 June remain/leave referendum on the European Union and its potential consequences have been respondents’ biggest tail risk, followed by any devaluation or defaults from China and ‘quantitative failure’.
The attention on the remain/leave referendum has dented confidence towards UK equities, with the allocation plunging to the lows of November 2008 (it’s now at a net 36 per cent underweight, down from a 20 per cent underweight last month) while sterling is seen as its second most undervalued level ever.
City Financial’s Gill Hutchison said: “‘Brexititis’, a debilitating condition causing a sense of disquiet and a lack of activity, is spreading through markets. Scenario analysis helps managers to prepare but the only sensible course of action for them ahead of the referendum is to maintain a balanced approach to the risks.”
“In aggregate, managers’ portfolio activity levels were already at low levels because of the reality that there are precious few companies that are either thriving in our low growth world or are sufficiently fruitful as turnaround stories. That problem has also seen the number of portfolio holdings dwindle in many portfolios as managers concentrate on their best ideas.”
“Of course, the sun will rise again on 24 June and whatever the outcome, the market is sure to throw up opportunities. More contrarian managers, who thrive upon volatility and emotional chaos, are licking their lips –though perhaps with a higher degree of trepidation than normal – and are polishing up their buying boots.”
While the UK has seen the biggest change in month-on-month positioning, as shown in the graph below, others areas to be hit by a pullback include regions like the US and the eurozone as well as sectors such as industries, tech and consumer staples.
Month-on-month changes to fund manager positioning
Source: BofA ML Fund Manager Survey
Japan, which has been somewhat of a darling of fund managers over recent years, has also fallen out of favour. The allocation to Japanese equities has dropped to a net 6 per cent underweight – the lowest since Shinzo Abe was elected prime minister in December 2012.
However, emerging markets have benefitted with investors moving overweight the region for the first time in 17 months. A net 2 per cent of fund managers are now overweight emerging markets, which have suffered a torrid time in recent years but are now viewed as an area of value in global markets.
Macroeconomic forecasting consultancy Capital Economics said: “Emerging market equities have outperformed those in developed markets in the past three months. We think the support to emerging market equities from rising commodity prices may now begin to fade, but better news from China should ensure that they still perform well.”
“Valuations still do not look unattractive. Admittedly, the rally in the past three months has now left price/12-month forward earnings ratios above their five-year average in most countries. However, that is probably only because analysts’ forecasts for corporate earnings have yet to catch up with an improving outlook. And in any case, that measure of valuation remains far more attractive than it does for developed markets.”
