April 20, 2016 / 8:02 PM / 3 years ago

Seeing rally as fragile, some funds back away as U.S. stocks near record

NEW YORK, April 20 (Reuters) - The rally that has sent the benchmark S&P 500 up more than 15 percent from its February low is prompting U.S. diversified funds to sell shares as the market nears its record high.

The average asset allocation fund - so called because the funds can invest in anything from stocks to bonds and currencies - has 40.2 percent of its portfolio in U.S. equities, down 1.2 percentage points from six months ago, according to Lipper, a Thomson Reuters company.

The average weighting to U.S. stocks is nearly 2 percentage points less than it was at when stocks last reached record high in May 2015, suggesting that fund managers are less bullish now.

Chief among fund managers’ concerns: Oil prices will level out or once again decline, taking away a major catalyst for higher stock prices. Since hitting a 12-year low of $26.05 on Feb. 11, the price of U.S. crude oil is up nearly 60 percent, settling at $42.63 on Wednesday.

“My guess is that it’s unlikely that crude will sustain over $40 a barrel, which is a calamity for the U.S. oil patch. A lot of these people need $50 a barrel oil to stay alive,” said David Wright, a portfolio manager at Sierra Investment Management who oversees $2 billion in assets.

Wright, who has been moving more of his portfolio into municipal bonds, said that stock valuations will also put a lid on further gains for the market. The benchmark S&P 500 trades at a forward price-to-earnings ratio of 17.8, above a long-term average of 15.

The S&P 500 closed at 2,100.80 on Tuesday, putting it up 2.7 percent for the year to date. It remains 1.5 percent below its record intraday high of 2,134.72 reached on May 20 of last year.

Ashwin Alankar, global head of asset allocation at Janus Capital Group, said that much of the jump in U.S. stock prices has come in high-dividend stocks. Investors have searched for yield in light of expectations that the Fed would delay its plan to raise interest rates.

As a result, “we believe that the rally you are seeing in U.S. equities is a fragile rally,” because it is not based on improving growth prospects, he said.

He is moving more of his portfolio into emerging market stocks in areas such as South America and Southeast Asia that have seen political and economic reforms, making their stock market gains “more sustainable,” he said.

Overall, asset allocation funds have proved popular, bringing in $17.8 billion year to date, pushing assets to $762 billion, according to Lipper.

Alan Gayle, head of asset allocation at RidgeWorth Investments, said he remains cautious in part because U.S. consumer spending continues to disappoint despite steady job growth. While he is neutral in his weighting to U.S. stocks now, he said he expects to trim his position if the S&P 500 does not reach a new record soon.

“The market is hovering around a critical tipping point,” he said. “If it fails to hold current levels, that would suggest the downtrend is still in place.” (Reporting by David Randall; Editing by Nick Zieminski)

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