UK funds trim equities in June after strong rally

LONDON (Reuters) - UK fund managers reduced equity weightings slightly to 64.9 percent in June following a sharp rally in stock markets over recent months.

The average equity allocation fell from 65 percent at the end of May while bond allocations were also trimmed to 23.3 percent from 23.6, a survey of 11 UK-based fund managers showed. Cash weightings were cut to 4.6 percent from 5.0 while alternatives, such as commodities and hedge funds, rose to 5.2 percent from 4.7 and property allocations edged up to 1.9 percent from 1.8.

The FTSE 100 index of blue-chip stocks is down almost 3 percent in June but is up 18.2 percent since the lows seen in early March.

Over the past four months, UK fund managers have steadily increased equities exposure amid signs that economic conditions had stopped deteriorating and after equities had hit low valuations in March.

In June, six managers made small reductions in their allocations to stocks but three added to exposure and optimism can still be found.

"Equity investors are pricing in too much bad news about future cuts to dividend payments, while the gap between dividend yields and cash rates is at attractive levels on a historical basis," Andrew Milligan, head of global strategy at Standard Life Investments.

"We see good value in both bonds and equities, which is why we are heavy in these asset classes and light in cash," he said.

Chris Paine, a director in the asset allocation team at Henderson New Star, also saw potential for further re-ratings of equities.

"Equities are not as cheap as they were a couple of months ago due to the market rally, but we are now seeing a slowing in the pace of downgrades which could lead to upgrades in the near future," he said.

(Reporting by James Molony, editing by Mike Peacock)