Global fund managers have shifted to an underweight in Asia within an international equities portfolio for the first time in six years, the latest Citigroup analysis of fund flows shows.

Elaine Chu, Hong Kong-based regional equities strategist at Citigroup, says the turnaround in the consensus weighting in Asia to underweight in end-July from the previous overweight is most likely the combined result of the impact of the US subprime mortgage crisis and the regionÆs sharp gains prior to that. The shift in weighting in July has led to net outflows in country funds in Asia in August, except for those investing in Hong Kong and South Korea.

ôIf you ask me why this [weighting downgrade] is happening now, I would say itÆs probably because the region experienced a bull run from 2003 until early this year,ö Chu says. ôEmerging markets have outperformed developed markets quite a lot. It makes sense that when global fund managers are feeling nervous, such as they are now with the global credit crisis, they would cap risks by moving into safer assets.ö

Cash appears to be considered the safer asset now, as cash holdings have generally increased globally. The consensus cash position of global fund managers rose to 3.8% of their portfolios in July, much higher than the consensus 2% in June and the historical average of 3%. Many fund managers usually set an upper limit for cash holdings at 5% of their portfolios and tend to be closer to that limit when they are more bearish.

The higher cash position also reflects the slight retreat of global fund managers in the US, where the consensus underweight has deepened, and Europe, where the consensus overweight has been trimmed.

Within Asia, global funds investing in China experienced the sharpest net outflow in August at $863.8 million, a dramatic change from a net inflow of $3.7 billion in the same month last year. Citigroup relies in part on data provided by EPFR Global, which tracks around US$10 trillion in assets of traditional and alternative funds domiciled globally.

The consensus bearish sentiment of global fund managers on Asia will likely remain.

ôAlthough it is hard to say if the net outflows in August is a start of a trend, I would interpret the big jump in the average cash position as a very bearish movement. The sentiment changed so suddenly,ö Chu says.

In terms of consensus weightings for specific markets in Asia, global fund managers turned most bearish on China in July [they were most bearish on Malaysia in June]. Hong Kong has remained their most favored market in Asia and the Citigroup data suggests that funds that were pulled out of China found their way into Hong Kong.

ôThe valuation for China stocks have been very rich,ö Chu says. ôBut investors still want to have a position in China, so they do that by investing in Hong Kong. It makes sense to move to Hong Kong, which is a lower beta market in Asia.ö

Country weightings of Asian fund managers differ from those of global fund managers, however.

Asian fund managers are most overweight on-average in Indonesia and most underweight in India. The difference has to do with mandates of global funds. Many fund managers who run global portfolios tend to allocate mostly to US and European markets, and Asia usually gets only around 5-6% of that money.

ôIf I were a fund manager managing a global fund, I probably wouldnÆt care about very small markets such as Indonesia and Thailand,ö Chu says.