The MarketsJanuary 21, 2010

BofA Merrill Lynch Survey Finds Fund Managers Embrace Equities

Investors have rediscovered their risk appetite and are putting cash reserves to use, according to the BofA Merrill Lynch Survey of Fund Managers for January.

Reported by Ellie Behling

For the first time since January 2006, the survey found investors are taking above-average risk, relative to their benchmark. A net 2% is taking “higher than normal” risk, compared to a net 7% taking “below normal risk” in December. The latest survey results follow several months of investors displaying more cautious optimism about the economy (see “Fund Managers Look toward Positive Returns in 2010” and “Fund Managers’ Risk Appetite on the Rise”).

Average cash balances have fallen to 3.4%, the lowest reading since mid-2007 and down from 4.0% in December, according a release of the survey results. Meanwhile, appetite for equities is up. A net 52% of asset allocators are overweight equities, up from a net 37% in December.

“This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research, in the release.

Fewer investors are protecting themselves against a fall in equities, according to the survey. A net 55% have no protection against a fall in the next three months, compared with a net 48% in December. Investors have been moving into cyclical stocks, are positive about profits, and are urging management teams to invest in growth, the survey found.

“We are, however, seeing early signs that might alert contrarians looking for a selling opportunity—namely low cash allocations and possible complacency against a selloff in stocks,” said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

Four out of 10 respondents want to see corporate spend on capital rather than improving the balance sheet, which has been investors’ priority for the past year and a half. A net 55% of the panel said that companies are currently under-investing, up from a net 48% in December.

The desire to see greater investment in growth reflects how optimism about corporate earnings has pushed higher, BofA noted. A net 63% of surveyed global investors expect corporate earnings to increase by at least 10% over the next 12 months.

A total of 209 fund managers, managing a total of $539 billion, participated in the global survey from January 8 to 14. A total of 169 managers, managing $404 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.