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Fund managers turn defensive as markets hit highs

Fund managers turn defensive as markets hit highs

Global fund manager allocations to defensive sectors have reached an eight-year high, according to Barclays.

The bank found that fund managers now allocate more money to defensive sectors than those that rely on the health of the economy. It represents the first time that global fund managers have positioned their portfolio in this way since early 2009, and comes as markets in the UK, US and Europe trade near all-time highs.

The switch is mostly due to a shift out of technology stocks, with 8% of funds lowering their exposure to the sector during the second quarter. Nevertheless, global funds remain overweight tech, healthcare, staples, and telecoms in comparison to their benchmarks. 

Managers moved out of sectors that are more cyclical in nature, such as financials, energy and materials, to a level that hasn't been seen for a decade.

It was a different story for European funds. Barclays found these funds were overweight cyclical sectors relative to their benchmarks, with fund managers running relatively high allocations to technology and energy. Financials also found favour, with 40% of European funds running an overweight position in the sector relative to their benchmark.

Valuation warning

Separate research from Bank of America Merrill Lynch also showed that fund managers had grown cautious. European fund managers are sat on an average cash pile of 5.3%, the highest figure since March 2003.

Bank of America Merrill Lynch found the average cash position amongst global fund managers was a little lower at 4.9%, higher than a 10-year average of 4.5%.

Higher cash piles help to explain why 46% of managers - a record high - described the market as looking overvalued. Their outlook for earnings was also negative.

Only a third of investors surveyed expect corporate profits to improve over the next year, down 25% from the beginning of the year. This is the lowest level since November 2015.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said the outlook for corporate profits had taken an ominous turn this year. In his opinion, this should be taken as a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones.

‘Further deterioration is likely to cause risk-off trades,’ he said.

The global economic picture represented another concern for fund managers. For the second month running, investors highlighted policy mistakes by the Federal Reserve and European Central Bank, alongside a crash in global bond markets as the two biggest risks facing markets. 

Fortunately, it wasn't all doom and gloom from the fund managers. There was a 6% increase in the number that expect a ‘Goldilocks’ scenario of above-trend growth and below-trend inflation to 42% of the sample. Almost half of investors said they would be ‘most surprised' to see a recession over the next six months.

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Profile: Kevin Doran's formula for success at AJ Bell

Profile: Kevin Doran's formula for success at AJ Bell

From a degree in theoretical physics to teaching and becoming one of the youngest chief investment officers in the UK, Kevin Doran has certainly had an interesting career.

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