In the wealth management business, behavioral finance is the study of the influence of psychology on the behavior of investors and the subsequent impact on the markets. It’s an important topic for discussion because of its explanatory power of irrational investment decisions. We are constantly bombarded with news and live in a culture of information overload. Fortunately, we can use some of this information in our favor when making investment decisions. What if there were information out there to help us better understand investor sentiment and was more concrete than individual opinions?
There are many different ways of performing a financial analysis in an effort to gain insight on the true intrinsic value of a financial asset to determine if it’s a desirable investment opportunity, and it has been proven repeatedly that diversifying your assets and properly rebalancing these assets can lead to higher risk-adjusted returns over the long run. The challenge then becomes an exercise of when and how to get started and having the courage to stick with the plan.
Bank of America Merrill Lynch publishes its fund manager survey monthly, which helps provide better clarity on how fund managers are positioning their portfolios. This survey group, comprising 231 panelists, has been ranked as the fourth largest in the world, and the group collectively manages $646 billion in assets for clients globally, as of the October 2018 survey1. In this survey, cash balances held steady at 5.1 percent, which marks the highest amount of cash holding in the last 18 months. The value in this information is that it provides a peek behind the curtain to where cash is flowing — or not flowing, in this instance.
Money managers are able to hold cash as part of the portfolios both for diversification and business purposes, normally anywhere from 3.5 to 5.5 percent; however, they have mandates that they must attempt to achieve, which must be done through investment. In short, fund managers are holding cash at the upper end of the normal range — meaning, at some point, cash will hit the market, which should create upward pressure on current prices.
The power in this particular information is that this is not the opinion of any average individual but, rather, is the opinion of hundreds of portfolio managers and reveals where they are placing their bets. If used appropriately, this can provide key insight and actionable information that can help you feel more comfortable and confident on getting and staying in the market.
For a more granular examination of market activity, the Investment Company Institute (ICI) provides key information on fund flows in major asset classes — both foreign and domestic — on a weekly basis. The information ICI provides will give you a better understanding of where investor funds are flowing and is widely used as a tool to better understand investor sentiment. For example, you can identify investment trends, how macroeconomic factors affect investors based on their actions and how investors around the globe are positioning their portfolios. As a result, this data can be used to provide a greater level of confidence regarding asset class allocation selection.
ICI also provides information on money market mutual funds, which can be thought of as cash or cash equivalents and, when used with the Bank of America Merrill Lynch data, can be a very powerful tool in understanding and predicting money manager and investor sentiment.
The most successful investors are those who not only know how to obtain information but, more importantly, also know how to use that information in their decision-making processes. They understand that many minds are greater than one. This works both at the initial decision to start working with a financial advisor as well as throughout the continued management of investments. By choosing to work with a trusted financial advisor, your clients have already made the conscious decision to plan for their future and to start achieving their financial goals. The use of readily available market information, such as money manager cash positions and mutual fund flows, can prove to be tremendously valuable and help both advisor and client stay on the right path even during the most challenging times.
1 Bank of America Merrill Lynch, “Global Fund Manager Survey.” 16 October 2018.
Disclosures: All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Index performance does not reflect the deduction of any investment-related fees and expenses. It is not possible to invest directly in an index. Asset allocation/diversification of your overall investment portfolio does not assure a profit or protect against a loss in declining markets. Securities offered through 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors, Inc. 1st Global Capital Corp. is headquartered at 12750 Merit Dr., Ste. 1200 in Dallas, Texas 75251; 214-294-5000. Additional information about 1st Global is available via the Internet at www.1stGlobal.com.