U.S. funds turn against stocks and favor debt in September: poll

By Siddharth Iyer

(Reuters) - U.S. funds cut recommended allocations to stocks for a fourth straight month and increased debt exposure as the U.S. Federal Reserve again put off raising interest rates, a Reuters poll found.

Cash holdings in model global portfolios were also increased, another sign of defensive thinking in a month when the Fed held off on higher rates for the second time this year, citing concern over the global economy.

The Fed is still expected to raise rates in December, for the first time in nearly a decade. But, a separate Reuters poll of bond strategists suggested the era of low sovereign bond yields had at least a year to run. [US/INT]

Still, bond markets present better returns compared with the losses from stocks in the U.S. and abroad this year.

The poll of 12 U.S. money managers showed recommended stock holdings in a model portfolio were cut to 51.3 percent in September from 52.6 percent in August. They are now down more than four percentage points since January.

Recommended bond holdings rose to 37.8 percent from 37.7 percent in the previous month, up over three percentage points since January.

"We feel this asset class (bonds) offers limited return opportunity over the near-to-intermediate term. Having said that, the only rationale for increasing bonds would be to shelter portfolios from declines in risk assets," said Jeffrey Layman, Chief Investment Officer at BKD Wealth Advisors LLC.

U.S. stocks are down around 10 percent this year and the S&P 500 is on track for its worst quarterly performance in four years in the current three months to September.

Wall Street strategists in another Reuters poll published this week cut year-end equities expectations from three months ago, but they still expect the S&P 500 to recover and gain 11 percent from current levels by the end of December. [EPOLL/US]

But fund managers recommend reducing U.S. and Canadian share holdings to a nine-month low within the equity portfolio. They left allocations to euro zone stocks unchanged.

The European Central Bank is expected to expand its asset-purchase programme, now worth 60 billion euros a month, to ward off deflation. The expectation has lowered euro zone sovereign yields, in some cases below zero. But inflation rates have not picked up, falling to -0.1 percent in September.

Government bonds outside the euro zone are expected to offer better returns, so asset managers have cut their exposure to the region's bonds. Japan's central bank is also expected to expand its asset purchases, possibly as soon as October, and fund managers are also avoiding Japanese debt.

U.S. funds recommended holding nearly half of fixed income in government securities, just over a third in investment-grade debt, and around 10 percent in high-yielding notes.

(Polling by Krishna Eluri and Deepti Govind, editing by Larry King)

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