Fund Managers Are Sitting on Cash. Why?

The stock market rally since October hasn’t fazed tactical allocation funds - they have kept moving out of stocks. 

Michael Dobson 28 July, 2023 | 3:13AM
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Michael Dobson: Stocks have been flying this year, with the tech sector leading the way – and already, the first six months of the year have been the complete opposite of 2022. But not everyone is optimistic that the second half will be quite like the first.

A lot of investment managers publicly expressed doubt that we’ll see stocks continue to rise. In fact, by one measure, investment managers haven’t been so out of stocks since the latter part of 2020. By tracking the average equity weight of tactical balanced funds here in Canada, we can get a barometer for how they’re thinking, at least in the short term.

Let’s back up. What’s a tactical balanced fund? They’re the weird and wacky allocation category that can do whatever they like. If they want to go 100% into stocks, they can do so. If they decide they want to go all in on bonds the next day, nothing is stopping them.

That’s an extreme example, but it serves to show the freedom these managers possess in the category. And, since they have few restrictions, these funds are perhaps the purest picture of how these managers are thinking about the market at any point in time. So what are they thinking? Let’s take a look.

Using the average equity weight to determine the collective feeling managers have of the stock market, we can see the ebbs and flows of optimism and pessimism. The last ten years saw a few of these pivots with the latest one happening some time in the second quarter of last year. The market’s rally since October hasn’t really fazed them – tactical funds kept moving out of stocks. One of the biggest movers over the last year or so was National Bank Investments’ Tactical Asset Allocation fund.

The CIO Office there manages the strategy with a shorter-term outlook, typically three to twelve months, and leverages the larger National Bank resources to analyze a vast amount of economic data. Currently, they believe stocks are less attractive than bonds in the short-term which contrasts their stance a year ago. The portfolio’s reflected this. From the end of May 2022 to May 2023, the fund’s equity weight dropped over 60%. It went from an 80/20 portfolio to a 20/80 one.

So, will the CIO Office and the larger tactical space be right? Will a strong second half make them re-evaluate? We will continue to monitor tactical balanced funds and their portfolio positioning to see how the collective space navigates the markets from here.

For Morningstar, I’m Michael Dobson

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Michael Dobson  Michael Dobson is an Associate Manager Research Analyst at Morningstar Canada

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