Fund managers are once again increasing their cash allocations to defend against increasing uncertainty; that’s the key takeaway from Bank of America Merrill Lynch’s monthly Global Fund Manager Survey.
The survey, which was conducted during the second week of October with 213 panelists managing a combined $563 billion, revealed that the respondents’ average cash level jumped from 5.5% during September to 5.8% at the beginning of October. The last time cash allocations if this level was after the Brexit to vote at the end of June. The only other times where cash as a percentage of assets under management has hit this level according to the aggregated figures is post-9/11 and November 2001.
The top three threats to markets cited by asset managers as being the catalysts for increasing cash allocations are an EU breakup, bond crash and threat of Donald Trump winning the White House.
Fund Managers – Cash weighing indicating buying opportunity
Even though Bank of America’s fund manager survey shows that institutional investors are cautious on the outlook for the equity markets the figures may be useful for contrarian investors. Past trends have shown that a high cash allocation among managers generally precedes a market rally. This relationship has prompted Bank of America to introduced an FMS Cash Rule which works as follows:
“When average cash balance rises above 4.5% a contrarian buy signal is generated for equities. When the cash balance falls below 3.5%, a contrarian sell signal is generated.”
So, for contrarian value investors now might be the time to return to the equity markets.
Other positioning takeaways from the Bank of America October fund manager survey include; the relative positioning of emerging market versus developed market equities has jumped the highest level since February 2013 and positioning of equities versus everything else (bonds, cash, commodities & REITs) has improved to 6-month highs. Based on positioning data gathered from the survey:
- Contrarians would short cash, tech, banks, REITs & discretionary (overbought)
- Contrarians would go long GBP, UK, equities & resources (oversold)
The survey also reveals some other interesting themes among the fund managers surveyed. For example, the number of investors (as a percentage of the overall sample) that believe global monetary policy is to stimulative is at a high not seen since July 2014. Meanwhile, 44% of the respondents believe that the biggest equity driver over the next six months will be Treasury yields.