Most Australian fund managers are bullish on commodity prices and significantly increased their exposure to the materials sector in December.
That's according to the JP Morgan Fund Manager Radar, a monthly gauge of the investment positions of 25 of the largest and most mainstream actively managed funds that release extensive information on their investments.
JP Morgan's report does not name the funds it surveys but instead assigns each a number, which is then used in comparing fund positions and performance.
Nearly 70 per cent of the funds examined by JP Morgan are highly exposed to the materials sector. With the exception of one fund – which believes current iron ore prices are around three times higher than their long-term sustainable levels and is heavily underweight in materials and significantly skewing the average weighting – most fund managers tracked expressed growing optimism about the sector.
"Our read of the monthly commentaries suggests that most are expecting more from the sector, with resilience in commodity prices buttressing this positive view," JP Morgan's analysts wrote.
December's move into materials came even though many fund managers expressed growing concern about China, whose growth recovery was feared to still be some months away. "While China is a perennial point of concern for investors, the December round of monthlies seemed collectively more anxious than in the past," JP Morgan's report stated.
And despite the bull market of recent weeks, many fund managers in their December retrospectives expressed concerns about the robustness of both corporate earnings and the broader Australian economy. "By and large, the views expressed were mostly negative," JP Morgan's report states, highlighting the comments of some funds which queried the robustness of earnings outside the materials sector.
The concern was echoed in a UBS earnings forecast on Monday, which stated that while the Australian market "is enjoying a strong acceleration in aggregate earnings growth" following two years of negative earnings growth, "this is overwhelmingly driven by resources".
"Weighted earnings per share growth excluding resources is showing some improvement but the pickup is less dramatic. Additionally, the 'typical' stock is not experiencing earnings growth anywhere near the weighted market earnings-per-share growth."
The end of 2016 was a tricky time for most Australian active fund managers, with a majority of funds tracked underperforming their relative index in December. Many were caught out by the extreme market moves that accompanied the election of US President Donald Trump in November.
"'Certain sectors – such as healthcare and telco – underperformed sharply," said JP Morgan managing director Jason Steed. "If your weighting was heavily geared towards these, that would have made it hard to perform."
Additionally, Steed said, many funds remain underweight in financials - in fact, many reduced their exposure to finance stocks in November. "December was a very strong period for financials," said Steel. A lot of the underperformance relative to market indexes can be attributed to this.
In December, there was a shift into financial stocks, though active funds remained, on average, around 3.3 per cent underweight in the sector overall. The most popular sector to be overweight is still discretionary consumer stocks, but November and December both saw some funds pull exposure out of the discretionary sector and into materials.
Meanwhile, funds further slashed their exposure in December to real estate investment trusts, industrials and telco stocks.