LONDON Global investors raised their equity holdings to a 10-month high this month as a healing world economy saw portfolios rotate further out bonds, but cash levels also rose, for the first time since May.
In a monthly Reuters poll of 52 leading investment houses in the United States, Europe and Japan, funds on aggregate held 52.2 percent of their investments in equities, the highest since April and up from 52.1 last month. But this marginal rise slowed sharply from the biggest monthly jump in the survey's history in January, of more than two percentage points.
Aggregate bond weightings fell to 36.4 percent, the lowest since June, from 37.2 in January.
The survey was conducted between February 14 and 26, but most answers were given before this week's inconclusive Italian election results and Moody's downgrade of Britain's sovereign credit rating last Friday.
However, cash levels have been creeping back up and rose to 4.5 percent in February after falling every month since July. That reflected some caution that the risk asset rally could slow given the absence of strong economic data, rather than a turnaround in investor morale.
"Having begun the year with a bias towards equities, we are becoming more cautious on the sustainability of the current rally and have begun adding downside protection into strategies whilst continuing to capture market upside," said Paul Amer, investment manager at Insight.
"That said, interest rates across the developed world anchored at historic yields continue to support risk appetite at these levels in the absence of any exogenous shocks."
World stocks are struggling to sustain strong gains seen in 2012 and at the start of this year. The benchmark MSCI index .MIWD00000PUS slipped about 1.5 percent in February after a near 12 percent rally from mid-November to end-January.
The index shed more than 2 percent in the past week alone after hitting a near five-year high on February 20.
'JUNK' STILL HOT
Highlighting still strong risk appetite, however, investors placed 13.2 percent of their debt holdings in junk bonds, up from 12.8 percent in January.
"We are still constructive on risk assets for 2013 and believe that there is significant value e.g. in European equities," said Boris Willems, strategist at UBS Global Asset Management.
"However, after the recent rally we feel the scope for positive surprises looks increasingly limited and the likelihood for a short-term correction is rising."
In another sign of a more cautious mood, more than two out of three respondents said they believed implied volatility in major equity and currency markets - as measured by the options market - was too low. The answers came in before the CBOE Volatility index .VIX, Wall Street's so-called fear gauge, soared more than 30 percent on Monday over the Italian vote.
Allocation to Japan, where the government has renewed its fight against deflation, ticked up for a third month in a row, to 13.3 percent from 13.2.
However, less than half of respondents said they would increase their equity allocation to the world's third-largest economy this year.
Tokyo stocks have risen as much as 28 percent and the yen has weakened more than 11 percent since mid-December when Prime Minister Shinzo Abe led his party back to power with promises of aggressive monetary and fiscal stimulus.
The February Reuters asset allocation poll also showed that a small majority - 17 out of 32 - of investors believe the U.S. dollar will be the best-performing major currency this year.
British investors are continuing to put more money in stocks, with their share in portfolios edging 50 basis points higher in February to 54.8 percent, the fourth consecutive monthly increase.
Continental European investors were more wary of risky assets than their peers this month. They pared back equity holdings by 0.7 percentage points from January's 22-month high.
(Additional reporting by Chris Vellacott, Stephen Eisenhammer and Dasha Dasha Afanasieva in London, Maria Pia Quaglia in Milan, Sarmista Sen and Namrata Anchan in Bangalore, Hideyuki Sano in Tokyo and David Randall in Washington; Editing by Susan Fenton)