As stock market rallies, U.S. firms pull back allocation

By David Randall

NEW YORK (Reuters) - With stock indexes at record highs, U.S. fund managers pared their total equity allocations to the lowest level since 2007 in October and raised cash holdings to the highest in almost a year, a Reuters poll found on Thursday.

The survey of 12 U.S.-based fund management firms taken Oct 15-30 showed aggregate cash weightings in balanced portfolios at 3.8 percent in October, up 0.3 percentage points from last month and the highest since November 2012.

The drop of 0.2 percentage points in recommended equity allocations, although little, pushed them to 55.9 percent in October, the lowest at least since the financial crisis began in 2007.

Fund managers pinned the cutback on the stock rally and the move by Congressional Republicans to shut down the federal government from October 1 to 17 in an attempt to block President Barack Obama's signature healthcare law.

"The whole showdown in Washington was frightening for a lot of investors, and definitely it was a reason for some of them to take some chips off the table," said Daniel Peirce, a senior portfolio manager with State Street Global Advisors.

Firms started the year with an average of 64.7 percent of assets devoted to stocks, and have steadily reduced their holdings while the Standard and Poor's 500 stock index has rallied more than 24 percent for the year.

While investors cut their overall allocation to equities, they did not pull back from the United States itself. The average allocation to U.S. and Canadian stocks rose to 67.4 percent from 66.5 percent, its highest level since February.

Peirce attributed that move to a combination of low bond yields and slow but steady U.S. economic growth, which has made the country's stock market more attractive.

"The outlook for equities may not be that generous when we're already at record highs, but the bottom line is that there is more potential (in stocks) than what you can get from other assets like bonds and cash," he said.

Regional breakdowns also showed increases in euro zone equity holdings at the expense of Japan and Britain.

The average holding of Japanese stocks fell to 4.9 percent of portfolios, the lowest level since February. Assets invested in euro zone companies rose to 14.2 percent of stock portfolios, the highest level since February 2012.

The year's big theme that arrived in May is a switch from emerging markets to developed markets as nerves about Chinese growth and Fed tapering undermined currencies of countries such as Brazil, India, Indonesia, Turkey and South Africa. The poll showed fund managers again opting for developed market shares over emerging market stocks.

Bond allocations edged up to an average of 35.6 percent of assets from 35.5 percent.

Recommended allocations to investment grade and high-yielding bonds, at the expense of government bonds, rose to the highest since June and August respectively.

(Additional reporting and polling by Sarbani Haldar and Swati Chaturvedi; editing by Stephen Nisbet)