U.S. Fund Managers Make Few Changes To Portfolios In February

Mar 2 2015 | 6:45am ET

By Ashrith Doddi (Reuters) - Fund managers in the United States raised their recommended exposure to North American debt to the highest in nearly four years in February, but made minor changes to their overall global model portfolios, a Reuters poll showed.

Regarding their global allocation to debt, they favored increased exposure to both corporate investment grade and junk bonds, but suggested cutting exposure to government debt.

That reflects how some funds are looking for higher yield, but overall are less willing to buy into stocks - an asset class slightly more risky than investment grade bonds - as they remain unsure about the timing of the Fed's first interest rate hike from a record low in place since 2008.

"The U.S. economy will continue to grow but probably not at as fast a pace as in the last two quarters (and) I think the Fed will be very careful," said Wayne Lin, portfolio manager at Legg Mason.

Federal Reserve Chair Janet Yellen's comments this week that the central bank would consider interest rate hikes "on a meeting by meeting basis" have not made it any clearer as to when the Fed will tighten policy, although June still seems the more likely date according to forecasters.

In Europe, benchmark 10-year German bund yields have fallen by more than 120 basis points in the last year, driven by falling inflation in the euro zone, which turned negative in January.

To prevent deflation from taking hold, the European Central Bank will start buying 60 billion euros worth of, mostly sovereign, bonds with newly printed money each month from next month through to September next year.

But U.S. fund managers' recommended allocation into euro zone bonds was largely unchanged.

A separate Reuters poll conducted this week showed just half of analysts expect the ECB's QE program to push inflation closer to its target. [ECB/INT]

Within U.S. fund managers' global equity portfolios, the recommended allocation into U.S. shares dropped slightly in favor of shares from Asia ex-Japan.

"There was a fair bit of sentiment that was anti-U.S. because of the strong dollar that we felt wasn't warranted and that led to a temporary decline in the sentiment toward the U.S. market, so it was very much more of a tactical move," Lin said.

The dollar has rallied over the past year and has gained almost 6 percent since January against a basket of currencies, while prospects for quantitative easing in the euro zone have pushed the euro down around 20 percent since last June.

Other minor changes in U.S. fund managers' portfolios from last month included a cut in British and Japanese bond allocations.

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