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Investors piling into cash amid ‘bond shock’ fears

Survey shows more fund managers fearful that both share and bond prices are too high and taking safety in cash.

Investors piling into cash amid ‘bond shock’ fears

Investors are continuing to hoard cash and put bonds and equities on the backburner over concerns of an overvalued market. That is according to the most recent Bank of America Merrill Lynch, Global Fund Manager Survey.

A total of 208 fund managers responsible for $579 billion (£439 billion) participated in the survey, which assesses market sentiment and positioning.

Conducted in the first week of September the key finding of the survey was an all-time high of investors saying both equities (shares) and bonds were over-valued, with 54% of respondents stating they had become too highly priced. The number regarding stocks as expensive was the highest since May 2000, shortly after the dotcom bubble started to burst.

The survey also highlighted a strong belief among professional investors that a 'bond shock' was on the cards whether that was from a spike in inflation, US interest rate rises  or stronger than expected performance in the world'slargest economy.

Over 80% (83%) of respondents said the Bank of Japan and the European Central Bank would maintain negative interest rates for the next 12 months. This is while 82% said they thought bond prices in developed markets were 'frothy'.

Managers have been put off amid concerns of a potential bond bubble and have therefore moved more heavily into cash, albeit not to the 15-year high seen earlier this year.

The survey's publication came as Richard Woolnough, the UK's leading bond fund manager, said that investors were better off keeping their money in cash rather than investing in bonds.

Last week Citywire revealed that Woolnough had taken the unusual step of adopting 'negative duration' on UK bonds to protect his £15 billion M&G Optimal Income fund.

In a blog post on the M&G website, Woolnough compared the income on a ten-year German government bond with a €100 note and said that as both were zero there was no advantage owning the bund.

'However, the potential gains and losses of owning a bund still exist. Consequently, at these low yields I believe the upside for bonds versus cash is limited.'

According to the BoA Merrill Lynch survey, the average cash balance in the managers' portfolios sits at 5.5%, up from 5.4% in August.

When asked why they had moved into cash, 42% of participants said it was due to a bearish view on markets, while 20% said they had a preference for the stability of cash over low-yielding equivalents.

Investors felt the most 'crowded', or popular, investments were high-quality, defensive stocks in the consumer staples, utilities and telecommunications sectors. These have been highly prized in the post-financial crisis era in which interest rates plunged to all-time lows, much to the benefit of fund manager such as Nick Train and Sebastian Lyon who have relied on their robust profits to power their funds.

2 comments so far. Why not have your say?


Sep 14, 2016 at 11:58

To me, having 5.5% in cash says that they think there is just a one-in-eighteen chance that their pf values will go lower than their present value minus the costs of selling. So, not quite as sensationalist as presented by the financial media, who work hard to extract sensation out of a basically dull subject.

Me, I'm about ten percent in cash in my shares ISAs, which says I think there is a one in ten chance that market or sector corrections in the next few months will enable me to buy some of the investments I want to make, cheaper than they are today. I think that's a reasonable position in view of high valuations, low growth, and central bank policies in the doldrums.

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Sep 15, 2016 at 14:30

@Micawber. You don't fancy putting half that cash into a physical gold ETF like PHAU then? Quick to liquidate, same yield (zero) but seems to be tipped for some upside on the price...

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