Global fund managers have turned their least bullish since October last year and raised cash levels to a 12-month high, according to the latest Bank of America Merrill Lynch fund manager survey.
Based on concerns surrounding inflation and pessimism towards China; October’s survey revealed that, for the first time since April last year, global growth expectations turned negative, while allocations to bonds slumped to an all-time low.
In March last year, a net 91% of global managers predicted the global economy would strengthen in the coming 12 months, whereas in this month’s survey a net 6% felt the economy will weaken.
Additionally, 15% of managers predicted profit growth to slow – the lowest figure since May 2020 – while a net 51% of investors think corporate profit margins will decrease, which is down a huge 29 percentage points on last month’s survey.
Set against this background, allocations to commodities jumped 10 percentage points month-on-month to a net 28% overweight, cash rose to 27% and bonds fell to an 80% underweight.
Making the most of opportunities
Vincent Ropers, co-manager of the TB Wise Multi-Asset Growth Fund, is an advocate of raising liquidity levels when conditions begin to imply higher volatility levels.
“One of the key advantages of holding cash, particularly for active multi-asset investors, is that increased liquidity allows for opportunistic purchases when valuations decline to attractive levels and discounts widen for investment trusts,” he said. “It is a means for us to stay on the front foot.”
Ropers currently holds 4.3% in cash, compared to an average of 2% over the past five years.
“Central banks will be doing everything they can to taper stimulus without a market tantrum,” he said. “But there is plenty of room for market gyrations against a complex macro-economic picture and a pandemic that has still not entirely abated.
“Hence, a cash position that does not present too much of an opportunity cost is sensible at this point.”
Playing defence
Turning to bonds, with record low or negative yields on a range of government and investment grade securities, Ropers noted the risk/return reward in fixed income is not looking particularly appealing.
That said, he added there are opportunities for investors willing to explore “below the surface”.
“We increased our positions in more defensive plays as the cycle progressed, but only in strategies and trusts that present attractive upside as well as some protection relative to equities,” he said.
For example, the TB Wise Multi-Asset Growth Fund has increased its exposure in the TwentyFour Income Fund.
“This is a bond trust that invests in higher-yielding asset-backed securities such as mortgages, credit card debt and auto loans,” Ropers said. “Those assets have lagged the recovery despite presenting some cyclicality.
“Meanwhile, the quality of the credit work from the team at TwentyFour gives us protection on the downside and the fact that asset-backed securities use floating rather than fixed rates offers a hedge against rising rates if the reflationary environment.”
Elsewhere, Ropers is increasingly allocating to vehicles exposed to structural growth themes – such as the International Biotechnology Trust.
