U.S. mutual funds prefer safety to opportunity

By Muralikumar Anantharaman

BOSTON (Reuters) - U.S. mutual fund managers aren't flocking towards equities and remain cool towards bonds, despite U.S. stocks slipping into bear market territory.

A combination of surging oil and commodities prices, a sputtering U.S. economy and the prolonged credit crisis is making managers cautious and steering their stock funds toward defensive sectors such as healthcare and telecom. Some managers have also allocated more to cash.

"How many chances do you get to own decent high-quality, big-cap type investments that could be up 100 percent in three or four years? You don't get those chances very often," Robert Hagstrom, a fund manager at Legg Mason Capital Management, said at the Morningstar investment conference in Chicago last week.

"At the same time, this is a very scary time," he said.

The S&P 500 index .SPX and the Dow Jones industrial average .DJI have been down more than 20 percent compared with their October highs in the past week, signalling a bear market. Hot international markets such as China and India have dropped even more over that period.

Bonds have been pressured in the past few months by inflation concerns. And the U.S. dollar has weakened, especially against European currencies, due to rising interest rates in Europe. The European Central Bank ECB.L raised rates by 25 basis point on Thursday to 4.25 percent, their highest level in nearly seven years.

Oil, meanwhile, rose to a record high of $145 a barrel on Thursday.

"Compared with our benchmark, we are underweight both stocks and bonds. We are convinced that the world economy and the financial markets are in a period of change," said Dennis Stattman, senior portfolio manager at BlackRock Inc and lead manager of its $29.2 billion Global Allocation Fund.