Global investors have raised their cash holdings close to a two-year high and cut equity exposure, as spikes in volatility leave fund managers unsure where to put their money.
Managers now have 5 percent of their portfolios in cash on average, the highest level since June 2012 and up from 4.6 percent in April, according to the Bank of America Merrill Lynch (BofAML) Fund Manager Survey. Asset allocators are also reducing their equities weighting, which has fallen from 45 percent last month to 37 percent in April.
More than one-third of investors say a geopolitical crisis is the largest threat to market stability, while another third are fearful of a Chinese debt default.
"Investors are showing belief in the economy but with two big question marks: Are we on the brink of a disruptive event? And why, at this point in the cycle, isn't this recovery stronger?" said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
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Other sector changes in equities last month reinforce the sense investors are scaling back, the survey found. Some 15 percent added to their positions in defensive utilities and energy. Another 8 percent cut back on technology and banks, according to the survey, which polled 218 managers running a total of $587 billion of assets.
John F. Vail, chief global strategist at Nikko Asset Management, one of Asia's largest regional asset managers, said the firm cut its overweight stance in equities for the first time in nearly 3 years, lowering its allocation to neutral. Vail cited geopolitical risk as a key concern.
Volatility in equity markets has shaken the nerves of investors, said Jeff Kleintop, chief market strategist for LPL Financial. He said that led to outflows from funds that invest in U.S. stocks last week after net inflows in five of the past six months, according to data from ICI.
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"While stocks were relatively unchanged last week, daily and intra-day volatility has been notable—the S&P 500 saw 1 percent intraday moves on Tuesday, Wednesday, and Thursday," said Kleintop.
"So, while ongoing volatility with pullbacks of 5 percent or more is likely, a bear market—defined by a decline of 20 percent or more—is very unlikely in 2014," he added, using moves in the U.S. Treasury yield curve as an indicator.