Just before I get started this morning, another quick reminder – my colleague Merryn Somerset Webb is hosting a webinar on 28 July with James Dow, co-manager of Baillie Gifford’s Scottish American Investment Company (Saints). They’ll be talking about all the goings on in the world, but with a particular focus on where to find the most resilient dividend payers in global markets. Sign up now (it’s free)!
Back to this morning’s topic.
Today we’re going to be looking at where the world’s fund managers are putting their money. It might give us some ideas as to where we should be putting ours.
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Why flows matter more than fundamentals
I like to check out the Bank of America global fund manager survey every month. It asks the world’s fund managers where they are putting their money right now.
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Why is it useful? Fundamentals are important to markets in the longer term (which is itself a moveable feast, admittedly). But in the shorter term, what matters is the flow of money. It doesn’t matter if a company’s fundamentals are great – if no one wants to invest in it, share prices aren’t going to go up.
Now, the point of markets and market efficiency and the perfect availability of information and all the rest of it, is that if a company’s fundamentals are great, then of course money should flow to it. But it’s important to realise that this is the mechanics of how it works. A company (or sector, or market) looks good, and therefore attracts money by people who want to profit.
If the market isn’t actually all that efficient, or if the incentives are skewed, then this link between fundamentals and money flows is not a given, certainly not in the short term.
For example, if you’re a global fund manager, then certain markets are always going to matter more than others because they’re bigger, which means they dictate the performance of the benchmark against which you are judged. So if something like Brexit is hanging over the UK market, say, then it’s easy to just dismiss the whole thing rather than delve deeper into what may or may not be mis-priced.
There’s also the question of sentiment. The truth is that more than a few people are clearly baffled by the market’s rapid recovery since March. At the end of the day, you can’t look at the world economy and say that its prospects are brighter than they were a year ago.
(I mean, I suppose you could argue that Covid-19 has accelerated trends that were already going to happen. And so in a way it has brought certain issues to a head that were coming anyway and thus brought us closer to some sort of denouement for this cycle. But that would be a pretty esoteric argument.)
The thing is, if you’re a professional investor, then even if you’re baffled about the market going up, that doesn’t mean you want to stay short or “underweight” at a time when the market has already surged, leaving you playing catch-up.
Professional fund managers suffer from a “fear of missing out” (FOMO) too. They’re more similar to the gamblers currently juggling Tesla shares on the Robin Hood app than maybe they’d like to admit.
This is one area where the likes of you and I have an advantage over professional managers. We don’t have to let our FOMO get the better of us. Even if we’ve missed the entire rally since late March, then no one is going to haul us over the coals or sweep their money out of our portfolios. We don’t suffer career risk.
That in turn means we should be able to look at our investments more objectively. And that’s a skill you need to cultivate, because controlling your emotions and avoiding mistakes driven by fear, greed or regret, really is one of your most valuable advantages.
Anyway, this is why the BoA survey is useful. It gives you an idea of what the people who are in charge of a big chunk of those money flows are thinking.
So what are they thinking?
Investors are neither too bullish or too bearish
The most obvious point is that despite soaring markets, fund managers are by no means blithely bullish. The amount of cash that managers are sitting on actually rose slightly, showing that they’re not piling into the market.
Meanwhile more than two-thirds (high, though not a record amount) think that the US market is overvalued. And a whopping 74% think that being “long US tech stocks” is the most “crowded trade”. That’s the highest reading on record for that category.
Most still reckon that there won’t be a V-shaped recovery. In fact, on that front, they’ve grown more pessimistic in the last month.
In short, this is not a bullish group of investors.
What about the specifics? The consensus that tech stocks are overly popular is interesting but it’s hard to say what it tells us. You can either take that to mean that investors might pull back from investing in them until there’s a bit of a correction.
Or you can take it to mean that everyone thinks that “yes, tech is too expensive, but what’s the alternative?” (This is precisely the attitude that Jeremy Grantham of US asset manager GMO found among his peers near the peak of the tech bubble in 2000).
Another interesting point is that commodities are suddenly returning to favour. As a group, global investors spent the entire period from about the end of 2012 to the end of 2016 being heavily “underweight” commodities.
That started to change a bit over the last few years, but it’s really perked up now. More investors are now “overweight” commodities than at any point since July 2011.
I wouldn’t take that as a contrarian “sell” indicator. The overweight currently stands at 12%, compared to a 2011 boom era peak of about 25%. It does suggest that there’s growing enthusiasm for the sector amid concerns about inflation, and I suspect it also shows that this run has more legs than the brief burst of enthusiasm we saw in 2016.
Value stocks (energy in particular), the UK, and banks remain largely shunned. That doesn’t mean they’ll end up doing well in the near term (Lord knows they’ve been hated for ages and have hardly shot the lights out). So it’s no help in timing. But it does mean that when the cycle turns, those will be the assets that benefit most, simply because they’ve been the most neglected.
One other thing to note – Modern Monetary Theory (described by BoA as “extreme debt financing”) – makes an appearance as one of the biggest shifts investors will have to grapple with in a post-Covid world. That sudden burst of attention does rather help to explain the increasing popularity of gold.
Anyway – overall I wouldn’t say there are any glaring “buy” or “sell” signals in this month’s survey. But what it does suggest is that there’s no obvious reason to expect a big change in the overall market tone in the near future. Investors are by no means too bullish but they’re not massively bearish either.
So stick to your plan. Maybe we’ll get a relatively quiet summer before the pre-election nerves kick in. If you haven’t already done so, then now might be a good time for you to start building a watchlist of assets you’d like to buy if and when they get cheaper.
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