Global fund managers are raising cash because they increasingly believe that both bonds and stocks are too pricey.
That was the view found in the latest monthly survey of fund managers from Bank of America Merrill Lynch. The results match what some big investors were discussing Tuesday as a risk for investors at CNBC/Institutional Investor’s Delivering Alpha conference.
Bearish views from the conference added to the negative tone and sell-off already underway in markets. The sell-off in Treasurys drove the yield on the 10-year to 1.73%, its highest level since early June. A poorly received 30-year bond auction on Tuesday added to the selling pressure. The Dow was down 250 points.
Traders pointed to comments at Delivering Alpha from Paul Singer of Elliott Management, who was extremely bearish on long-term bonds.
“With the rates that currently exist in global bond markets, the term ‘safe haven’ applied to G7 bonds is just plain wrong. These are not ‘safe havens’. There is a tremendous amount of risk in owning 10-, 20-, 30-year bonds at these rates,” he said.
Mark Carhart, chief investment officer and founding partner at Kepos Capital, told the conference “the 60/40 portfolio is the biggest risk” for investors. That is the long-popular investment strategy where investors hold 60% stocks and 40% bonds. “I would take as much out of that as you feel comfortable and put it into alternatives” like emerging markets, he said.
Stuart Fiertz, co-founder, president and director of research at Cheyne Capital Management, agreed. He told the conference the top risk is “an unwillingness to step outside of the main asset classes of rates and equities. Investors who are heavily positioned in those two are going to have a difficult time in the next couple of years.” He urged investors to look for nontraditional parts of the market, saying rates and equity markets are distorted right now.
Bearish Views
BofA’s survey showed fund managers raised cash to 5.5% in September from 5.4% in August, and the most popular reasons were their bearish views on the markets and a “preference for cash over low-yielding equivalents.” The cash level was at an all-time high of 6.3% after 9/11 in October 2001. It currently is at the higher end of the range of 4.2% to 5.8%, since 2013’s “taper-tantrum” sell-off.
BofA’s survey also showed that 42% of fund managers who have taken higher cash positions held bearish views. But now, the fund managers are holding a level of equities to cash at the lowest level in four years, and that normally is a good entry point for stocks, according to BofA. It sees cash levels above 4.5% as a potential buy signal.
US equities fell to a net 7% underweight from a net 11% overweight in August.
A net 54% said they see both stocks and bonds as overvalued, the highest level since the record 55% in April 2015. The percent of fund managers who see stocks as being overvalued was the highest since May 2000, said BofA.
