Fund chiefs may want to take note of what their portfolio managers are saying as they prepare their budgets for the coming year. Merrill Lynch's most recent survey of fund managers finds the portfolio professionals to be increasingly pessimistic about prospects for the economy. A significant number of that group is raising cash as a result.

While the growing cash levels in funds won't effect fund firm revenues, a downturn in the stock market would knock a hole in fund advisors' bottom lines.

Fully 60 percent of 213 fund managers who responded to the Merrill Lynch survey over the past four weeks said that the expect the economy to weaken over the coming year. That is up from just five percent who held a pessimistic view just three months ago. According to Merrill officials, the current reading is the lowest since the survey was created, surpassing the low readings registered after the start of the Gulf War in 2003, the September 11 attacks and the corporate scandals of 2002.

A net 44 percent of respondents believe corporate profits will deteriorate over the next 12 months, up from 9 percent who took this view in May. Meanwhile, a net 43 percent of participants expect corporate operating margins to weaken in the same timeframe, up from 27 percent in May. In a new question this month, two thirds of the panel said they believed it 'fairly' or 'very' unlikely that global corporate earnings would rise 10% or more over the next 12 months.

"This survey is so grim it could constitute a contrarian signal," says David Bowers on behalf of Merrill Lynch. "High cash levels, high risk aversion and extreme pessimism about growth are the raw ingredients for a stock market rally if we get the merest pinch of good news to add to the mix."  

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