U.S. funds recommend highest cash holdings in six years in July: Reuters poll

[July 31, 2014]  By Michael Leibel and Ashrith Rao Doddi

NEW YORK/BANGALORE (Reuters) - U.S. fund managers recommended the highest cash holdings since the start of the financial crisis in July, becoming more defensive over the standoff between Russia and the West on Ukraine, a Reuters poll showed.

Recommended cash allocations in a model global portfolio jumped to just under 5 percent, the highest since the U.S. sub-prime crisis in the U.S. began heating up in January 2008.

Overall stock holdings in global model portfolios, however, ticked down to 56.1 percent of assets in July from 56.2 percent in the previous month, according to the latest Reuters poll of 12 U.S. fund managers taken July 17-29.

Within the global equity allocation, fund managers preferred American and Canadian shares, climbing 2.1 percentage points to 69.6 percent in July, the highest in three years.

"Conflicts between Russia and Ukraine and within the Middle East seem to have driven investors to the perceived safety of (U.S.) and Canadian equities," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management.

Despite strong returns in the stock market this year, fund managers on average have recommended decreasing stakes in stocks. Since the beginning of 2014, the benchmark Standard & Poor's 500 index is up about 7 percent, but model portfolio holdings in equities are down 0.3 percent.

Recommended allocations to Japanese and euro zone equities fell in July. Fund managers also recommended cutting holdings of Asian shares excluding Japan - a category which includes Russian stocks - to 2.9 percent from 3.7 percent.

Russia's RTS index <.IRTS> has fallen more than 15 percent since mid-July on rising tensions with the West over its involvement in Ukraine.

Russia fought back on Wednesday over new U.S. and EU sanctions imposed over Ukraine even as G7 leaders warned of further steps.

Fund managers have also recommended a higher cash allocation because company shares with small market capitalizations haven't been performing very well, noted Alan Gayle, senior investment strategist at RidgeWorth Investments.

Since the beginning of 2014, the Russell 2000 Index <.RUT> the most widely watched measure of the performance of small- to mid-cap companies, is down 1.7 percent.

"Once you get out of the S&P 500 and the large-cap space, you see that the small-caps have been struggling," Gayle said.

As with U.S. and Canadian equities, recommended allocation into bonds in those regions increased slightly, to 71.9 percent, on a rising trend since May.

Government securities continued to make up the bulk of model global fixed-income portfolios. Allocations there increased in July to 40.6 percent, after falling 3 percentage points in June.

That comes even as the U.S. Federal Reserve inches closer to the end of its bond purchase program. It cut its monthly purchases to $25 billion at its policy meeting this week, on track to wind it down this autumn.

But it will be a while - probably the middle of 2015 - before the Fed raises interest rates from a record low.

(Reporting by Ashrith Rao Doddi, Ishaan Gera, Siddharth Iyer, Michael Leibel; Editing by Ross Finley, Larry King)

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