Europe fund managers cut government bonds, buy high-yield credit - Reuters poll

LONDON Thu Dec 20, 2012 4:44pm GMT

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LONDON (Reuters) - European fund managers hunting juicier yields cut government bond holdings to a more than two-year low in December and turned instead to high-yield corporate credit, a Reuters poll showed on Thursday.

Equity holdings maintained their edge over bonds this month as optimism about a pick up in global growth next year coaxed investors into riskier stocks, the survey of 20 leading asset managers based in continental Europe showed.

At 46.8 percent of portfolios on average, allocation to stocks was second only this year to November's 20-month high.

"We don't believe 2013 will be that great for bonds, but we do think it will be a better year for equities," said Steven Steyaert, portfolio specialist at ING Investment Management.

Equity holdings rallied for seven out of the last 12 months, while cash holdings edged up to 6.9 percent in December from 6.1 last month, but remained well below this year's high of 12.5 percent.

Fund managers trimmed their allocation to government securities to 48.1 percent in December from 49.5 percent the previous month and hiked their allocations to high-yield or "junk" corporate debt to its highest level in over two years.

PERIPHERAL

But even as optimism over global economic growth in 2013 improves, it remains a major concern. One third of the 18 investors who answered the question in the poll cited macroeconomic risks, such as lower-than-forecast growth, as the largest challenge to their portfolios in 2013.

"Our scenario is tilted in favour of riskier asset classes. It is thus highly vulnerable to disappointing macro data or new phases of stress in the euro zone," said Nadege Dufosse, senior asset allocation manager at Dexia Asset Management.

Worries about a break-up of the euro zone receded, with two investors naming it as the biggest threat, while three cited the U.S. "fiscal cliff".

Most investors - 15 out of the 18 who answered the question - expect the equity markets of some European countries to outperform those of other developed nations in 2013.

Out of these, eight tipped peripheral euro zone equity markets as the top performers next year, saying perceived political risk is fading.

"Italian or Spanish equity markets offer an attractive valuation with much more re-rating potential than core euro zone markets," Dufosse said.

"The upside potential remains nevertheless highly dependent on the ability of European decision makers to give more oxygen to EMU (euro) countries and be more flexible in the austerity constraints.

(Additional reporting by Maria Pia Quaglia in Milan; Editing by Ingrid Melander and Stephen Nisbet)

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