Fund managers around the world continue to be “unambiguously bullish” in their outlooks for markets and the economy, the latest Bank of America Global Fund Manager Survey shows. 
BofA’s monthly survey is a closely watched bellwether of sentiment among asset allocators, showing how they are positioning portfolios, what they are expecting to see in the months ahead and where they consider the best opportunities to be.
In May’s survey, the bank polled 194 fund managers who were running a total of $592bn. It was carried out between 7 and 13 May, offering a fairly recent snapshot of their views.
Growth and inflation expectations
Source: BofA Global Fund Manager Survey – May 2021
The above chart highlights just how confident fund managers are that the roll-out of coronavirus vaccines and the re-opening from lockdown will lead to a massive economic bounce.
The expectation of above-trend growth and inflation has become the consensus view among asset allocators, with a record 69 per cent saying this is what they believe is going be seen during the Covid recovery.
Fund managers’ biggest tail risks
Source: BofA Global Fund Manager Survey – May 2021
Of course, this isn’t entirely good news as markets have become increasingly jittery about the prospect of higher inflation. Over the past few months, the yield on government bonds has climbed while growth stocks – such as tech – have struggled.
In recent days, we have seen US inflation surprise on the upside at 4.2 per cent while the UK’s rate more than doubled in April to 1.5 per cent.
The above chart shows how inflation is considered by fund managers to be the biggest risk in markets today, cited by 35 per cent of respondents. The associated risk of a ‘taper tantrum’ caused by tighter monetary policy is worrying 27 per cent of investors, followed by 15 per cent being concerned by asset bubbles.
Just 9 per cent said the Covid-19 pandemic is their biggest worry, a big climbdown from 2020 when it was the largest tail risk by quite a margin.
The next three charts show how the expectation of higher growth and inflation are influencing asset allocation decisions.
Fund managers’ overweight to late cyclicals
Source: BofA Global Fund Manager Survey – May 2021
Here we can see that fund managers are “massively overweight” late cyclicals, or the types of stocks that tend to outperform later in the economic cycle.
This is a period when the use of resources and labour gets closer to full capacity while the demand for materials such as copper, steel or energy outpaces supply, resulting in higher inflation.
Bank of America found that a net 30 per cent of fund managers are currently overweight bank, a net 20 per cent are overweight materials and a net 14 per cent are overweight energy.
Z-score of tech allocation since 2003
Source: BofA Global Fund Manager Survey – May 2021
The next chart shows how funds’ allocation to tech stocks – which led the market for the decade after the global financial crisis but have been hit hard by today’s reflationary environment – has drifted down relative to the MSCI AC World index.
The tech allocation z-score is currently at its third lowest level since 2006. Over this time, the rapid growth in tech stocks means their weighting in the MSCI AC World index has swelled from 15 per cent to 32 per cent.
Fund manager positioning vs history
Source: BofA Global Fund Manager Survey – May 2021
Looking across all sector reveals how portfolios are positioned for the ‘reopening trade’. The above chart shows the change in managers’ current allocation versus their 10-year history.
As can be seen, there’s a clear overweight to areas that tend to do well when the economic is going through strong growth and/or higher inflation. Commodities, banks, materials, industrials and energy all fit into this bucket of assets.
On the other hand, more defensive areas such as bonds, tech and utilities are underweight relative to his history as investors worry that interest rates are more likely to rise than fall if the economy continues to pick up.
Which investment factors will outperform over the coming 12 months?
Source: BofA Global Fund Manager Survey – May 2021
Looking over the next 12 months, most fund managers think that value stocks will beat growth. This is what would be expected in a period of higher inflation and, indeed, has been seen since November 2020, when the first vaccines were announced.
The number of fund managers back value has come down slightly since last month’s survey, although it remains a clear consensus. However, there has been a big jump in the number of investors favouring high quality earnings over low quality and those preferring high dividend yielding stocks over low yielders.