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All Bulled Up?

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Most mutual fund managers are bullish on stocks, according

to Merrill Lynch. Its January fund manager survey found that a high

percentage of the 307 managers surveyed think equities are undervalued by at

least 10%. “Managers’ overall optimism has improved, but it hasn’t gotten

carried away,” says Merrill Equity Strategy Analyst Sarah Franks. “You hear

a lot of stories now that the investment community is very bullish–’all

bulled up’ is the phrase people like to use. But that is not necessarily the

case. They are optimistic, but they haven’t gone wild since last month.”

However, looking back over the last two years of the survey, Franks found

that “when most managers think the market is cheap–the situation we have

now–usually they have lots of cash to put to work, which is not what we have

now,” she says. “So yes, they think it is cheap, but can they do anything

with it?”

The average cash balance among the 307 participants fell again this month

to 4.2% from 4.4% in December and 4.6% in November. Excluding hedge funds,

institutional and retail fund managers’ cash levels are the lowest Merrill

Lynch has ever recorded. “Basically, between December and January the market

was up, but you have more managers thinking equities are more undervalued

than they did previously,” says Franks. “More managers think equities were

undervalued, yet they don’t have as much cash as we would be comfortable


Additionally, the survey indicated that 27% of managers, up from 21% in

December, think global stocks are cheap. And more than two-thirds of

respondents think it unlikely that bond returns will exceed equities over

the coming year.

In terms of asset allocation, says Franks, the study revealed two

interesting things. “Managers are underweighted in insurance even though

they think insurance has the most pricing power and is strongly

undervalued,” she says. On the flip side, technology was at one point

extremely underweighted, whereas now managers are neutral, “even though they

say the stocks are overvalued and have the worst pricing power.” According

to the study, managers have also limited exposure to media, retailing, and

cyclical consumer goods, such as the automotive sector.

Also, despite talks of deflation, the report revealed that more fund

managers think core inflation will be higher a year from now, but they don’t

believe monetary policy is overly stimulative.