investor sentiment

Investor sentiment is a funny indicator.  Outside the US, investors try to figure out what way the tide of sentiment is flowing so they can set their portfolios to benefit from the prevailing direction.  Inside the US, on the other hand, professional investors try to determine the direction of sentiment so they can bet against it.

Surveys, of course, have the limitation that they tell you what the respondents have to say.  Normally secretive professionals may simply not respond, so you may end up surveying interns rather than senior managers; or they may not give their true opinions, for fear their views will be incorporated into the consensus before they are able to exploit them to the fullest.

Once you’ve set your portfolio, whether you then seek publicity for your largest holdings is a matter of personal preference or taste.  I would prefer not to do so, although I don’t regard the practice as border-line unethical, as some do.

two surveys

Anyway, I’ve come across two peculiar investor sentiment surveys recently.

–The first comes from the Chartered Financial Analyst Institute.  The Institute conducts a series of exams on academic portfolio theory, passing all of which results in the test-taker qualifying for a CFA charter (suitable for framing) that attests to the holder’s knowledge of the concepts. Once the province solely of professional portfolio managers and securities analysts, the current 90,000+ holders of the CFA designation are much more widely distributed through the various functions of investment-related organizations and the academic world.

Conclusions from the Global Market Sentiment Survey:

–Almost two-thirds of the 58,000 respondents to the survey expect the world economy will show no growth in 2012.  34% expect economic contraction; 29% think the world will tread water this year.

–About 60% expect that equities won’t be the highest return investment asset this year.  Among the competing alternatives, precious metals gets the most votes for top-performing asset, followed by commodities, bonds and cash.  Sentiment on this topic is split geographically, as well.  Of investors in the Americas, 45% think equities will have the best returns in 2012;  elsewhere, the proportion is only about a third.

The second survey is one conducted by a popular small-cap service I recently subscribed to.   Asked what they thought the probable returns for the S&P 500 this year might be, the most frequently given answer was a loss of 20%.

the respondents

As to the second survey, I was very surprised at how negative subscriber sentiment appeared to be.  I also looked at a couple of other surveys, one of which had some respondents saying small caps were too risky to invest in–yet, as subscribers, they were paying for information about small-cap stocks.  I don’t know what to make of that.

The CFA survey had one remarkable characteristic.  Half of the respondents had either not yet passed all the exams or had held their charter for two years or less.  Another 19% had been CFAs for five years or less.  These are not portfolio managers or senior analysts actually making investment decisions.   They’re much closer to being the man in the street.

my thoughts

I think the relative inexperience of the CFA survey respondents means that they’re much more indicative of what the man in the street thinks than of what the “smart money” is doing. In a section about employment opportunities, over half the respondents from Europe said that the job situation has deteriorated.  39% of those in Asia Pacific said the same.  So it’s also possible that the respondents have been unable to distinguish between their own career outlook and prospects for world equities.  My guess is that their macroeconomic and asset market answers are contrary indicators.

The (potentially oddball) respondents to the small-cap survey?  Clearly a contrary indicator, in my opinion.

All in all,  two small reasons to want to be bullish.