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Fund managers opt for bonds and cash rather than equities

International fund managers are pulling back slightly from equities and putting a bit more into bonds and cash, a monthly Dow Jones Newswires survey of managers reported.

Share prices in many markets worldwide have risen significantly since the second quarter of this year, so they may be ripe to consolidate their gains or correct downwards in the short term, respondents to the survey said earlier this month.

Bonds or cash may offer more steady returns over the next couple of months, they said.

Each month, Dow Jones Newswires surveys fund managers on portfolio weighting recommendations for the succeeding months, with most looking at a 12-month horizon.

"Global equities are looking a little tired after a strong run in the second quarter, both relative to bonds and against their own history. This argues for a pause, or possible short-term correction, in global equity out-performance relative to bonds," said JF Asset Management, which manages around US$500 billion worldwide.

Tony Dolphin, London-based director of economics and strategy at Henderson Global Investors, which manages around US$150 billion worldwide, thinks stocks have fully discounted better times ahead for the global economy.

"Stocks are vulnerable to any hint that the global economy is not recovering as hoped," Dolphin says.

Cash could provide a good hedge against the risks of investing in equities and bonds in the short term, fund managers say.

"Equities are at risk if oil prices or interest rates rise further than expected, or if profits slow significantly," said Standard Life Investments, which manages around US$200 billion worldwide.

However, fund managers who were polled maintained a positive long-term view on equities globally.

"Longer-term, the equity bull case remains solid," JF Asset Management said.

Within a global equities portfolio, managers are still most bullish toward Asia excluding Japan, and toward Europe. They suggest a slight underweight in the US and non-Asian emerging markets, the survey said.

Asian shares are still among the most attractive globally in relation to corporate earnings prospects, but could suffer profit-taking in the near term, fund managers say.

"Europe may have the biggest scope for a positive surprise on earnings," says Dolphin of Henderson.

"Companies are restructuring and cutting costs, helped by their ability to switch production to Eastern Europe," he says.

Within a global bond portfolio, fund managers are still positive on Europe, where they suggest a slight overweight. They suggest a neutral on Asia excluding Japan, and a slight underweight in the US. They're most bearish on Japan and non-Asian emerging markets, where they suggest a full underweight.

Bond yields in Japan "are too low, given growing evidence that a sustainable recovery in domestic spending may be underway," Dolphin says.
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