Bearish fund managers turn to tech and bonds

Sentiment is negative but professional investors are finding opportunities in these sectors. 

Professional investors are seeking refuge in big tech stocks and the bond market as banking issues and stubborn inflation spread fear through markets.

Bank of America’s fund manager survey for April, which tracks the investment preferences of global fund managers with nearly £600 billion in assets between them, found that the most crowded trade was “long big tech”, and investors were their most overweight to the bond market relative to shares since March 2009.

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“Sentiment turned more bearish in April, the most pessimistic thus far in 2023,” Bank of America said.

Allocation to technology increased to its highest level since August 2022 following seven consecutive months of underweight positioning as tech stocks fell in response to rising rates.

Technology shares have driven markets higher in 2023, with America’s Nasdaq index, which features the likes of Microsoft Corp (NASDAQ:MSFT) and Apple Inc (NASDAQ:AAPL) among its top stocks, rising more than 20% this year.

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Meanwhile, bonds yield far more than a year ago and investors can get yields of nearly 4% by lending money to the US or UK government, and even greater returns from corporate bonds.

So far this year, the average return for sterling corporate bond and strategic bonds funds is 2%, including income payments.

Nearly half of survey respondents said that investment grade will outperform high-yield bonds over the next 12 months.

Safer investment grade bonds tend to do well when investors are worried, as they value the security of fixed payments from established companies, while high-yield bonds can offer greater returns but are more sensitive to economic conditions.

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In the stock market, negative sentiment pushed investors back into defensives (utilities, staples, healthcare) over cyclicals (discretionary, banks, energy, materials) as they sought protection from the challenging economic backdrop of high inflation and interest rates.

Cash levels remained at 5.5% in April 2023, unchanged from March. Cash levels have been above 5% for 17 consecutive months, which Bank of America sees as a contrarian sign to buy shares. This length of time above 5% in cash is eclipsed only by the 32-month dotcom bear market.