Fund managers are feeling neurotic – that’s probably a good sign
The latest survey of global fund managers suggests they're feeling nervous about the current state of the markets. But that's not necessarily a bad thing, says John Stepek. Here's why.
I don’t spend that much time keeping an eye on investor sentiment measures, as I find that they’re very hit and miss.
However, there is one such survey I like to keep an eye on. And that’s the monthly Bank of America survey of global fund managers.
It’s often very useful to see what the experts are doing with their money – and then consider doing the opposite.
Why professional fund managers can be contrarian indicators
The monthly global fund manager survey from Bank of America does what it says on the tin: it asks fund managers across the world where they are putting their money.
Now, this is not “hard” data. The fund managers don’t have to answer, and no one is taking actual numbers on assets under management. But in the time I’ve been watching it, it seems to do a pretty good job of capturing the mood of the market. And it does tend to be useful as something of a contrarian indicator. In other words, if the managers are very very bullish, then it’s time to watch out. And if they’re very very gloomy, then it’s time to pile in.
How can this possibly be true? I mean, these are the experts, aren’t they? To be clear, this is not about casting aspersions on individual managers or even the industry as a whole. (There are plenty of elements that you can criticise the finance industry for – such as charging too much – but these people aren’t stupid or bad investors).
The point is, this survey is wide-ranging enough so that it essentially represents what everyone in the market is doing with their money. So when the pendulum swings too far in one direction, you can be pretty sure that a swing back is coming.
If everyone is bullish, then the truth is that the fundamentals don’t matter – if everyone has already committed all of their money, plus all of extra cash they can borrow, to the market, then it can’t go any higher. Similarly, if everyone has taken all of their money out in a fit of panic, then the market can’t go any lower.
So where are we now?
Fund managers are feeling neurotic
A record number of fund managers believe that the market is “overvalued”, according to the latest survey from BoA. And more than half of them still think that this is a bear market rally, rather than a new bull market.
You might ask what the precise distinction is there. And you’d learn that one of the annoying things about finance is that people combine decimal-point-specificity alongside technical-sounding jargon that doesn’t actually mean anything you can pin down.
But probably the best way to think of it is this: if you think this is a bear market rally, then you’re probably still sitting on your hands, sweating and hoping that the market falls and hits the March lows again, so that you can say “I told you so” while buying back in with both hands, so that you don’t miss the rally next time.
Or as my colleague Dominic would probably put it, “a bear market rally is just a bull market that you don’t have a position in”.
You might think that this says something rather gloomy about the market’s prospects, given what I’ve just been talking about. But this is the mistake that people often make with sentiment readings. It’s not what people think that matters. It’s what they’re doing with their money that counts.
On that front, the amount of cash fund managers are holding has slid sharply. In May it was sitting at an unusually high 5.7%. It’s dropped to 4.7% now. That’s the fastest such slide since August 2009.
However, at 4.7%, it’s still only at the ten-year average. So cash reserves could fall a good bit further before we’d be at “highly bullish” levels. Moreover, the people who are getting back into the market are the institutions. “Retail” funds – those owned by the likes of you and me, who are somewhat pejoratively referred to as the “dumb” money – "still have cash to deploy”, apparently.
Positioning has become somewhat less extreme. Investors still love the things they loved last month (tech, pharma and communications) and hate the things they hated last month (energy and materials). But they’re not quite as positive on the “hot” stuff, and not quite as negative on the shunned sectors. (Oh, as always in the post-Brexit era, everyone still hates the UK, and loves the US.)
In summary: global fund managers are still bearish, but they’re nowhere near as bearish as they were. There is still money sitting there, ready to enter markets, but there’s not as much of it. As the team at BoA puts it, Wall Street might be past “peak pessimism”, but their current optimism is “fragile, neurotic, nowhere near dangerously bullish.”
To be clear, I can entirely see why people feel that markets are overvalued (certainly in the US). And the recent surge higher does seem at odds with the fundamentals, to say the least.
The only point I’m making here is that we don’t typically see epic crashes starting when sentiment is at these sorts of levels.
So stick to your plan. Don’t be surprised if the steam continues to come out of the market a bit, given that we’ve had such a rally and positioning is less extreme. But equally, don’t expect a great big crash to present us with loads of fresh opportunities in the near term.
(And if you don’t already have a plan, or you would like some thoughts on how to amend yours, do subscribe to MoneyWeek magazine, and get your first six issues free.)