LONDON British investors moved their portfolios onto a defensive footing during August's market volatility, cutting exposure to stocks and boosting bonds and cash, a Reuters survey shows.
A monthly poll of investment mangers, in which 15 took part during August, showed they cut allocations to equities by more than two percentage points on average in balanced portfolios, to 50.4 percent. The average allocation in July was 52.6 percent.
The realignment of investment portfolios benefited bonds, which saw the average allocation climb to 24.4 percent from 23.5 percent, a month earlier.
However, cash saw the biggest boost from the flight to safety in spite of worries about the damaging effects of inflation, climbing to 5.4 percent from 3.7 percent.
Investors blamed the drop in confidence on fears about how much damage will come out of the euro zone debt crisis, and "political brinkmanship" in the United States over raising its debt ceiling.
"In the short term, corporate profitability should be okay, but if the absence of confidence persists, the economic slowdown could turn into something more serious," said Chris Paine, associate director for asset allocation at Henderson Global Investors (HGGH.L).
Some respondents said the extent of macroeconomic weakness had caught markets unawares.
"While we had been expecting a 'soft patch' in terms of economic data during the summer months, the weakness evident in many macroeconomic releases has proven to be greater than many market participants had predicted," said Paul Amer, investment manager at Insight Investment.
But while most respondents conceded the economic outlook has darkened, the market falls earlier this month may have gone further than the fundamentals merited, they said.
"Economic fundamentals do justify a fall in share prices, but as ever financial markets may well be pricing in too much bad news," said Andrew Milligan, head of global strategy at Standard Life Investments (SL.L).
"On balance our view is that markets had over-shot, that it was not right to price in recession although it is necessary to price in slow growth in coming years."
Other managers argued that as well as over-reacting to the possibility of slow, or negative, economic growth, market fears of another systemic crisis akin to the fallout from Lehman Brothers collapse in 2008 were also overdone.
"The system is less highly leveraged than 2008 and expectations lower. (This) implies that markets have over- reacted to news of slower economic growth," said David Millar, partner at Cheviot Asset Management.
12:00 28Jul11 -POLL-UK investors head for home market safety
By Christopher Vellacott
LONDON, Jul 27 (Reuters) - British fund managers are heading to domestic stocks and bonds as mounting worries about sovereign debt in the euro zone and United States add to the UK's allure as a safe haven in a volatile world, a Reuters poll shows.
A monthly survey of 14 investment managers found the average allocation in global equity portfolios to the UK increased 3 percentage points to 15.6 percent in July from a month earlier.
Allocations to the euro zone and the United States, where fears of possible defaults on creaking sovereign debt burdens have rattled markets, both fell during the month.
The average exposure to U.S. equities slid to 41.3 percent, from 42.1 percent, while euro zone allocations were at 14.9 percent, from 16.3 percent a month earlier.
Performance figures from Lipper earlier this month showed macro-economic shocks -- from the euro zone debt crisis to May's commodities sell-off -- had helped lift the performance of domestically focused funds during the first half of 2011.
An annual survey published this week by British funds lobby group the IMA shows equity allocations to the UK have been declining steadily in recent years, from around 59 percent in 2006 to 42.6 percent in 2010.
Several of the managers and chief investment officers surveyed by Reuters said a recent deal to make private investors shoulder some of the burden of bailing out Greece to stop contagion is unlikely to resolve the crisis conclusively.
"Crises, packages and tactical rallies will follow -- ultimately radical, comprehensive, broad scale solutions will be needed in large size," said Andrew Milligan, head of global strategy at Standard Life Investments (SL.L).
"Remain moderately light in the euro and certain peripheral bonds, buy export orientated equities, but in particular prepare portfolios for considerable future volatility."
Shares in British companies, which aggressively cut costs in readiness for the economic downturn, have emerged as an unlikely safe haven in recent weeks on account of strong balance sheets and resilient earnings.
But UK fixed income is also popular, the poll shows, with allocations to Britain in global bond portfolios rising to 37.1 percent from 34.4 percent a month earlier.
The poll echoes sentiment on currency markets in which Britain's growing appeal as an island of relative fiscal health in spite of a still sluggish economy has driven sterling to six week highs against the dollar.
Meanwhile, allocations in balanced portfolios by asset class remained broadly unchanged from a month earlier with average exposure to equities at 52.6 percent and bonds at 23.5 percent. Cash holdings were at 3.7 percent with 2.6 percent in property and 17.6 percent in alternative investments.
"This is not a time for the faint of heart, but bravery will be rewarded," said Lee Robertson, Chief Executive of Investment Quorum, a wealth manager based in London.