Pension funds thundering back into UK equities, Merrill Lynch survey reveals

UK fund managers are cutting down their cash holdings and pouring money into the London stock market, in a marked reversal of investment strategy.

Institutions are undeterred by the recent turmoil in Asia, according to the latest Merrill Lynch Gallup survey of UK fund managers, which found buyers of UK equities outnumbering sellers by 14 per cent - the highest figure since summer 1995.

Trevor Greetham, global strategist at Merrill Lynch, said: "In an international context UK equities offer value, the threat of spiralling base rates is receding and earnings could surprise on the upside. It is no wonder that both fund managers and company directors are buying stock".

Over recent years, fears of interest rate hikes have prompted UK fund managers to accumulate "war chests" of cash, according to Mr Greetham. But the growing belief that UK interest rates are at - or near - their peak has led to dramatic cuts in cash holdings.

In the December 1997 Merrill Lynch Gallup survey, cash made up 7.6 per cent of a typical fund manager's portfolio, the highest level seen since September 1990. In early February, by contrast, cash made up just 5.8 per cent of the typical portfolio.

The move from cash to equities looks set to continue over the coming months. Those fund managers planning to reduce cash outnumber those planning to increase it by 35 per cent, a three year high.

The recent upheaval in Asia has failed to deter UK fund managers from investing in stocks. 83 per cent of managers expect the Asian crisis to have only a "marginal" effect on UK corporate earnings, and just 15 per cent say the Asian crisis poses a significant threat.

US fund managers, in contrast are far more concerned about the fall-out from the Far East, with 23 per cent expecting US corporate earnings to take a "significant" hit.

There is no evidence that the recent rush into equities has been at the expense of UK bonds. UK fund managers remain strong buyers of gilts, with a balance of 22 per cent planning to increase their holdings - the same as in December 1997.

Not all UK equities are equally popular, though, with fund managers showing a marked preference for larger companies. A record 79 per cent of managers prefer FTSE 100 stocks to smaller FTSE 250 stocks.

UK fund managers' taste for equities is not confined solely to the domestic arena.

Mr Greetham said: "UK fund managers are also buying international equities, even those in the Pacific. Stocks in Hong Kong and Thailand are gaining support at the expense of the more defensive Australian market." A net balance of 14 per cent of UK fund managers were buying Asian equities in the February survey. In the January and December surveys, most UK fund managers were selling Asian stocks.

Elsewhere, fund managers on the Continent shared the optimism of their UK counterparts, with bullishness for European equities "reaching fever pitch", according to the survey.

In the US, fund managers were sellers of treasuries for the first time since March 1996. According to Mr Greetham, however, this reflects profit taking rather than increased confidence in the US economy. Bulls of treasuries still outnumber bears by 43 per cent.

Merrill Lynch and Gallup surveyed 282 global institutions, 72 of which were in the UK, between 2 and 4 February.

- Lea Paterson

Outlook, page 21