U.S. Funds Cut Equity Stakes to Year Low on Fiscal Worries

U.S. investment firms headed towards the new year defensively, with average equity holdings hitting a more than 13-month low and average bond weightings at their highest in all of 2012, a Reuters poll showed on Thursday.

December's move away from stocks coincided with concerns over whether the White House and Congressional Republicans can agree a plan to prevent government spending cuts and tax increases - the so-called fiscal cliff - scheduled for the new year.

Should the package take effect, economists warn that it would likely push the slowly growing U.S. economy into a recession.

The stalemate in Washington made even otherwise-bullish investors pause.

"I remain neutral on the markets while the uncertainty and risks surrounding the (fiscal cliff) are resolved," said Alan Gayle, chief strategist at Ridgeworth Investments. A resolution will likely send equity markets higher in 2013, he added.

The poll of 12 U.S. investment firms was conducted in the period Dec. 10-18.

All told, firms devoted an average of 59.1 percent of assets to equities, a slight drop from the 59.7 percent average weighting last month and the lowest average rating in all of 2012.

Bonds took up an average of 35 percent of portfolios, the highest weighting in all of 2012, and well above the low of 26.7 percent hit in April.

Investors moved money out of U.S. and Canadian assets as well. Equities in the region dropped to an average of 65.3 percent of stock portfolios from 68.3 percent last month, the lowest weighting since September's 65.1 percent.

Yet there were also signs that investors were becoming more bullish on Asian stocks and equities. The average stock portfolio weighting to Japanese equities rose to 6.2 percent from 4.7 percent last month, the country's highest weighting since a 6.4 percent stake in December 2011. The average weighting to Asian stocks outside of Japan rose to 6.1 percent from 5.5 percent.

Fund managers are adding more Japanese equities because they look more attractive o n an earnings per share basis than those in the United States, said Douglas Gordon, strategist at Russell Investments. The conservative Liberal Democratic Party's election win may also buoy investors' positive outlook, he said.

Japan's economy may get a boost through improved export prospects if incoming Prime Minister Shinzo Abe follows through on policy proposals that would lead to a weakening of the yen, Gordon said.

(Reporting By David Randall; Editing by Chelsea Emery)