Outlook: Don't risk running against the thundering herd

When the last bear turns bullish, the saying goes, then's the time to turn bearish. If you subscribe to this line of contrary thinking, the latest Merrill Lynch Gallup survey of UK fund managers provides plenty of food for thought. After more than a year of dithering on the sidelines, UK pension fund managers have suddenly decided to plunge back into the stock market with a vengeance.

In December, cash made up 7.6 per cent of the average portfolio - the highest figure since September 1990. Over the last month, however, that position has dramatically reversed. The average cash position has fallen back sharply to 5.8 per cent of assets and, by the look of it, is destined to fall further still. Those planning to reduce cash outnumber those planning to raise it by 35 per cent, a three-year high. Their main target, moreover, is UK equities. No wonder the UK stock market has seen such a dramatic rise so far this year. The FTSE 100 index alone is up more than 9 per cent. What's going on here?

Partly it's the obvious truism that cash hasn't yet paid. Those strongly into cash last year - PDFM, Gartmore, MAM, and Schroders - all found themselves bottom-quartile performers despite the wobble in equity markets caused by the crisis in the Far East. Furthermore, there is a general belief that interest rates have reached their cyclical peak and will be on the wane from the summer onwards. Short sterling is pricing in the risk of another small increase over the next month or two but it's all downhill after that.

There are also lots of micro reasons why UK equities look good value. For a start they weren't nearly such good performers last year as continental or US equities, for which there appears no good reason other than the general caution of UK fund managers. Consolidation and capital restructurings in British industry and commerce are creating a shortage of equity to boot, which in itself is driving up prices.

So perhaps the pension funds are right to turn bullish once more. Given how wrong most of them got it last year, their judgement is obviously open to question. All the same, now's probably not the time to be running against the herd; you're likely to be trampled under hoof if you do.