Back in September I suggested that my favourite contrary leading indicator – the weighting devoted to equities by institutional investors – was pointing to an imminent rally in stock markets. Once again it proved robust. But what’s happened since then?
LONDON, Feb 29 (Reuters) – Investors boosted their equity holdings to a 11-month high in February while they slashed bonds and cash allocation as monetary easing from major central banks, especially from the euro zone, eased concerns about the sovereign debt crisis.
The surveys of 56 leading investment houses in the United States, continental Europe, Britain and Japan showed on Wednesday a typical balanced portfolio held 52.3 percent of its assets in equities, compared with 50.5 percent last month.
I discussed an ancient article I published in which I argued (and data supported) that for the most part professional investors are fairly passive – when the weighting in an asset class increases, it’s because the returns for the asset class have grown in value rather than an effort to invest more money in a good thing. In my book, I suggest that one ideal situation would be maintaining a policy mix (diversified) – or in other words if there were a legitimate effort to “manage” the money we should see the weight in equities stay the same over time….when they go up in value and push up the weighting, the institutional fund manager sells some or rebalances back to the policy weight. Sell high, buy low!
Evidence of smartness among this community might be increasing the weighting pior to market rallies rather than just watching market values taking the weight higher – an even better strategy. We see no evidence of this though…ever. This quote (published back in September in my post Asset Allocation points to RALLY!) was consensus thinking among professional investors at the time, indicating a persistent and shared reluctance towards such proactivity:
“It is best to remain cautious for the time being with higher than usual exposure to core developed market government bonds and cash,” said Neil Michael, executive director of investment strategies at London & Capital.”
At the risk of repeating myself (over and over and over), when the consensus thinks (and behaves accordingly) that “it’s best” to do one thing, the other thing is the right thing to do. Since then there’s been a slowly growing appetite for equities; will the institutional investment community now rush into the stock markets? Generally the high end of the average weighting can get to 55% and even closer to 60% in the right conditions. But these conditions are only just beginning to be manifested.
Leading indicators, like the U.S. ISM Index are largely ignored until a pattern of steady improvement is confirmed by (old) data over a period of time. I believe this is because individual or personal risk must be avoided even if investment risk is actually quite minimal (group dynamics). We now have hard evidence of that pattern – things have obviously (note the past tense) gotten better since the summer of last year.
And (now dated but influential) frequent news releases confirm the obvious::
- US growth revised upwards to 3%. Annual GDP rate for final quarter of 2011 beats forecast
- The manufacturing ISM stayed above 50 for the 31st month in a row, which means that the sector is expanding or growing.
- Banks turn to ECB for €530bn. Second LTRO attracts 800 financial groups
- U.S. initial claims slid AGAIN in the last week of February. Those filing for UI claims for the first time fell 2k in the week of February 25th to 351k, the lowest since March 2008 and defying expectations yet again for some sort of retracement from the following week.
and that’s just over 2 days!
Retail investors are beginning to act if only modestly.
The Canadian mutual fund industry recorded net sales into long-term funds of $3.1 billion in the month, and total net sales, including money market funds, of $2.5 billion. Demand for yield helped drive good growth in net flows in bond and balanced funds while equity funds remained in net outflows. Overall, a good start to the RRSP season although more stable markets would provide a better platform for growth in equity funds.
We see a similar drift towards riskier finds in the U.S. and no doubt a contagion may finally begin to emerge. Also repeated ad nauseum in my book – prices go up because there are buyers. It will take many months, with perhaps the usual summer rest period, for institutional investors to have strategy meetings to discuss increasing (rather than just letting it increase due to market appreciation) their commitment to equities. The retail investor will probably be most aggressive in the fall months – too late as usual.
The other contrarian indicator in favour of this all occuring as I expect is that investment dealers, mutual fund companies and parent diversified financial companies are laying off people in droves……the same people they will need to hire back in about 8 months. If they’d only wait, they’d save a bundle in severance packages.