The success of fund manager predictions

When Expert Investor Europe last reviewed the accuracy of forecasts from its Manager Sentiment Survey, the results were mixed. Fund managers had been bullish on US large caps throughout 2011 – the correct call, given that the S&P 500 Index generated returns in all but one of the subsequent 12-month periods. Positive sentiment had even peaked at precisely the right time – in October 2011, when the benchmark was primed to generate its biggest one-year gain, of more than 30%.

Yet predictions for the other major equity regions were largely disappointing. For example, fund managers had been over-bullish on the outlook for Europe excluding UK stocks for most of 2011, and then over-cautious towards the end of the year. They were also wrongly upbeat on Japan and the emerging markets – regions which performed poorly throughout 2011, and for much of 2012. Indeed, in most cases, their forecasts were negatively correlated with subsequent index returns. 

 

So, repeating the exercise for data gathered in 2012 and early 2013, has our survey panel improved the accuracy of its predictions? And what do its more recent forecasts suggest is in store for global markets in the months ahead?

European, US and Japanese stocks made strong gains in 2013, as investors focused on opportunities in the developed world. Survey participants were largely successful in predicting the region’s outperformance, achieving a particularly high level of accuracy for Anglo-Saxon markets.

 

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Indeed, fund managers were 100% correct on UK equities – our sentiment reading was consistently bullish during 2012 and into 2013, tallying with the double-digit returns of the FTSE All-Share Index over all subsequent 12-month periods. As in our previous study, their predictions for US large caps were also mostly accurate, with survey participants rightly bullish three-quarters of the time. 

 

The US small cap and Europe ex UK equity forecasts were over-cautious, meanwhile. The Russell 2000 Index outperformed its large-cap cousin, the S&P 500, in all but one of the time-frames studied – peaking with a return of more than 40% in the year ending December 2013. Yet survey participants were neutral on US smaller companies two-thirds of the time. It was a similar story for the FTSE World Europe ex UK Index, where our panel was rightly bullish on just five occasions. 

 

However, its biggest miscalculation was in relation to Japan. In 2011, fund managers were over-bullish on the FTSE All World Japan Index, and were punished with falls during the majority of subsequent 12-month periods. In 2012, by contrast, survey participants were neutral on the benchmark for most of the year – implying that many asset allocators missed out on gains of more than 60%, as Japanese equities raced away in response to the ‘Abenomics’ reform programme. 

Fund managers were afflicted by over-bullishness on developing world equities in 2012 and early 2013. They were strongly positive on both the MSCI Emerging Markets and MSCI BRIC indices, yet were rewarded with returns of more than 5% on just three occasions, for the two benchmarks combined. In addition, sentiment on Brazil, Russia, India and China reached a peak in February 2013 – precisely when the index was poised to register its biggest one-year decline, of more than 14%. 

 

Forecasts for emerging Asia were more accurate, with fund managers bullish for 10 out of 12 months, and the FTSE World Pacific ex Japan benchmark producing gains in excess of 5% in all but two of the periods analysed. However, as with the emerging market and BRIC indices, fund manager sentiment was strongest exactly when the benchmark was primed to generate its most disappointing returns. 

Forecasts for the Citi World Government Bond Index were correct most of the time, with our panel rightly neutral in seven out of 12 months. However, its strongly downbeat stance from December 2012 to February 2013 was not matched by subsequent one-year performance. The benchmark fell, but by less than the 5%-plus levels predicted – echoing our analysis of 2011 survey data, which found fund managers consistently over-bearish on the outlook for sovereign debt. 

 

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Survey participants were also largely correct in their bullishness on property securities during 2012. The MSCI World Real Estate Index made gains over all but two of the following 12-month time-frames, and did not fall by more than 5% in any period. 

Looking at survey data gathered at the start of this year, fund managers have a clear favourite asset class for 2014 – Japanese equities. Indeed, our Japan sentiment indicator hit 89 in January – the highest such reading since EIE began compiling the poll in 2005, and a sign fund managers were near-unanimous in their confidence that stock prices would rise further.

 

This tallied with the Bank of America (BofA) Merrill Lynch Fund Manager Survey for January, which indicated that asset allocators remained strongly bullish on the one-year ou¬look for Japan. 

 

EIE survey participants were less enthused by European stocks than their BofA Merrill Lynch counterparts – a third of whom said they would like to overweight the region. Nevertheless, our Europe ex UK sentiment indicator remained at elevated levels – hitting 50 in January, down from 61 the previous month. Confidence in UK equities was even stronger, with a reading of 67 sug-gesting that a significant majority of fund managers were positive on the outlook for the FTSE All-Share. 

 

Expectations for all other asset classes began 2014 in neutral territory. The S&P 500 and Russell 2000, which regularly topped 50 last summer, were respectively at just 22 and 18 in January – suggesting previous strong performance created worries about valuations. For emerging market equities, neutral sentiment is a continuation of the pattern seen since the middle of 2013, when fears over the impact of US tapering prompted a sell-off in the asset class.