The stock markets appauded the latest economic rescue plans offered by the European Central Bank and the Federal Reserve earlier this month.
Meanwhile, inflows into equity ETFs have surged, reversing a previously long-standing trend of outflows from equity funds.
But it seems like one major group of investors hasn't been quite convinced it should join the party just yet: the "smart money."
Deutsche Bank's chief equity strategist Binky Chadha and his team make an interesting observation in a note to clients this morning – big portfolio managers remain underexposed to stocks, even despite supportive central bank action and positive price action in the markets this month.
In fact, Chadha writes that "equity positioning is underweight and still near summer 2011 lows."
From the note:
Following the largely-as-expected ECB and FOMC announcements, our measures of equity positioning indicate that fund managers increased beta exposure modestly. Despite the 4% September rally in equities, underweight positions remain, with our composite equity beta metric still near 2011 lows. This cautiousness stands in contrast to QE1, QE2 & LTRO1, after which PMs significantly increased beta and went overweight, helping push equities higher.
As markets pressed higher, equity flows surged; the 2 week inflow of $29bn was a record, the largest in the EPFR database (since 2001). Importantly, equity inflows were not isolated to the OMT/QE3 announcements and have sustained their momentum. Equity ETFs have had large inflows every day for the last 2 weeks, based on our database of daily ETF flows. As we have argued...inflows are key to fueling the next leg of the risk rally.
Chadha says that long-short equity funds are 12 percentage points underweight, while mutual funds are a percentage point underweight and hybrid funds are only 2 percentage points overweight. None of these moves represent significant increases from before.
Here is a chart showing the divergence between S&P 500 performance and hedge fund positioning in stocks this month:
Hedge funds haven't had a great year, but still – current positioning suggests the rally in stocks doesn't appear to be convincing everyone.
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