The level of fund manager cash holdings remains high and suggests there should not be a significant market sell-off soon, analysts say.
A monthly survey of fund managers found the level of cash they were holding in July as a percentage of all assets was 4.9%, a slight fall from the month before but still high enough for equities to be in “buy territory”.
The Bank of America Merrill Lynch (BoAML) survey had 179 respondents globally and found that many fund managers remained overweight in cash due to their bearish view on the markets.
BoAML’s ‘Cash Rule’ formula for calculating the likelihood of a sell-off means cash levels have to fall below 3.5% for the “big top”, or a sell signal, to happen. The average ten-year cash holding for fund managers is 4.5% – 4 basis points lower than the current level.
BoAML analysts said the reasons for fund managers holding higher levels of cash were: bearish views on markets (25%); a preference for cash over low-yielding equivalents (20%); and a need for funding, or “margin requirements”, to support more active allocation (6%).
The biggest risks the fund managers in the survey perceived were a bond market crash (voted for by 28% of those in the survey) and a policy mistake by the Federal Reserve or the European Central Bank (voted by 27%).
Michael Hartnett, chief investment strategist and one of the report’s authors, said: “Fund managers’ biggest fears are a shock coming from bond markets or central banks. Too many investors see the Fed as a likely negative catalyst.”
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