BlackRock's largest mutual fund warns on U.S., ups Japan stake

August 17, 2016 3:47 PM EDT

The BlackRock logo is seen outside of its offices in New York January 18, 2012. B REUTERS/Shannon Stapleton/File Photo

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By Trevor Hunnicutt

NEW YORK (Reuters) - Managers of BlackRock Inc's largest mutual fund are warning that U.S. stocks may "disappoint" investors, a company note showed on Wednesday, arguing for a shift to Japanese stocks as one of the few markets offering a bargain.

Nearly 10 percent of the $45 billion BlackRock Global Allocation Fund was made up of Japanese stocks, as of July 29, about double the 5 percent held by its benchmark, a BlackRock website showed. The fund has wide latitude to invest across stocks, bonds and other assets.

"During the month of July, we added to Japanese equities as we view the reappointment of (Japanese Prime Minister) Shinzo Abe's coalition combined with attractive valuations and corporate governance trends as a positive for risk assets in Japan," a note from the funds' managers said.

"Looking across the broad array of asset classes globally, few are unambiguously cheap. Investors with a strong U.S. bias may become particularly disappointed."

The note argues that U.S. stocks are priced at "valuations" that are "extended by most measures," meaning they likely are not a bargain.

U.S. equities nonetheless represent nearly a third of the fund's portfolio, consisting of stocks the note says are a good "long-term value." The fund's top holdings include Apple Inc, Google parent Alphabet Inc and Marathon Petroleum Corp.

By contrast, the note said Japanese equities are below their historical averages, citing an internal BlackRock analysis, and seem especially cheap compared to emerging markets, U.S. and European stocks.

In U.S. dollar terms, the MSCI Japan Index is up 8.6 percent since the end of June.

Abe and his ruling coalition won a landslide victory last month in an election for parliament's upper house. The prime minister is known for promoting an ambitious stew of hyper-easy monetary policy, fiscal spending and other economic reforms.

New York-based BlackRock is the world's largest asset manager. Institutional shares of its Global Allocation Fund have returned -0.57 percent over the last year, through July, trailing its longer-term record and 66 percent of its peers, according to Lipper, a Thomson Reuters research service. The fund is managed by Dennis Stattman, Dan Chamby and Aldo Roldan.

(Reporting by Trevor Hunnicutt; Editing by Tom Brown and Sandra Maler)

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