UK funds still favour alternatives

LONDON (Reuters) - British fund managers continued to build positions in alternative investments as commodities remain in favour though some have started to express concerns about overvaluation, according to a Reuters poll.

Allocations to alternatives increased to 11.8 percent in December, from 11.1 percent in November according to the Reuters poll on a like-for-like basis comparing the same respondents over the two months.

The increase marks the seventh consecutive month of growth in allocations to alternative asset classes.

However, some managers are starting to warn that some commodities may be overvalued, reflecting dollar weakness rather than underlying demand and could see falling values next year.

"Questions are being asked about some commodity prices, especially if the U.S. dollar were to change direction into 2010," said Andrew Milligan, head of global strategy at Standard Life Investments.

On a like-for-like basis, respondents' allocations to bonds fell to 21.2 percent in December from 22.1 percent in November, while equities slipped marginally to 60.3 percent from 60.4 percent

Some respondents singled out gold, currently trading close to all-time highs at around $1,100 an ounce, as an asset vulnerable to reversals in dollar weakness.

"Gold could be vulnerable to a reversal in the weakness of the dollar. Gold has benefited from its perceived hedge against any possible inflationary pressures, but inflation may not rise in the short term given the amount of spare capacity in economies," said a fund manager at London & Capital.

But Chris Paine, associate director for asset allocation at Henderson, said he believes gold is likely to retain its value for the time being.

"Although gold has risen very quickly in recent weeks there seem to be some decent reasons why the asset class should remain well bid: for example, Asian central bank demand and possible supply shortages," he said.

Weak economic fundamentals in the UK mean an imminent jump in inflation remains unlikely, managers said, but investors are positioning themselves to factor in rising prices in the medium term.

"We are seeing inflows into inflation-linked bonds especially from pension funds and similar long-term investors who have examined the dangers for their portfolios from an inflation shock in a few years time," said Standard Life's Milligan.

Twelve fund managers participated in the December 9-17 poll of asset allocations.