It’s always good to pay attention to what fund managers think. They’re strange creatures, often highly educated, regularly uncomfortable in social circles, and yet somehow able to make tough decisions that make investors a lot of money. It can be confusing comparing what they seem to say with what they do as market participants, though. Every month, Bank of America releases a survey called the BofA Global Fund Manager Survey, and it’s must-see entertainment for market watchers.
This month’s survey included charts that we thought were worth sharing. First, let’s take a look at the chart labelled “Chart 2”. This chart, for simplicity, indicates how fund managers feel at any given moment. A score close to 10 means things feel really good, and a score closer to zero is the opposite. As we can see on the chart, sentiment, as gauged by the FMS, is a fantastic contraindicator.
The chart, as annotated, would suggest that these people are morons… but we have to remember that the sentiment and trading are not the same. Generally, market inflections happen 6 months before inflections in sentiment, meaning that the fund managers are buying when they feel at their worst. This guage is also used by some traders to decide if there is a buy or sell signal in the market.
The recent change in sentiment was so rapid that it may have eliminated a “buy signal”. This is sort of interesting because there are market participants that care about this, but we generally prefer focusing on fundamentals. Which brings us to the chart labeled “Chart 1” discussing REIT positioning.
While we’re not quite to the lows, we have not had a lower sentiment on the REIT sector since the depths of the global financial crisis. As private market participants, this is far from a perfect indicator, but there is an obvious correlation with the private real estate market. Seeing managers underweight REITS by close to 30% does start to make us wonder, is it time to think about buying real estate again? Can we catch the falling knife? Or is it too early? Starting with the idea that REITs usually trade with an inverse relationship to interest rates, and the Fed reminding us near daily that they could still increase rates, it’s probably early.
But as we look back, during the GFC, it took 2 years for sentiment to bottom. We’re just 1 year into this current underweight position. With this in mind, we are obviously focused on finding the right time to get more involved in real estate transactions. And while these sentiment and positioning charts are interesting, they do not measure the differences in asset classes within real estate, and as we look forward, it is clear that Office, Multifamily, Retail, Hospitality and Industrial real estate will likely have diverging paths.