Salient to Investors:

Kim Shepherd at the Wilshire Trust Universe Comparison Service said institutional investors’ allocations to dollar-denominated bonds in Q2 were 26.2 percent of assets, the lowest level since 2007, and versus 32 percent of assets in Q4 2011.

David Darst at Morgan Stanley is advising clients to cut bond allocations to the lowest in more than 5 years, saying equities will outperform bonds over a 7-year time frame because bond yields are so low. He is slightly underweight in junk bonds and big underweight in corporates and governments, and said Morgan Stanley changed its recommendation to moderate high net-worth clients in March to 30 percent in bonds and 42 percent in stocks, versus 42 percent in bonds and 30 percent in stocks last year. Darst said it is important to own some debt holdings because of the deflation risk.

Berkshire Hathaway owns stocks worth 3 times its bond holdings.

Sheila Patel at Goldman Sachs Asset Mgmt said the extremely low-yield environment forces people to take risk, and doing nothing is risk because targets must be met and pensions paid.

Eileen Neill, at Wilshire said institutional investors are moving out of investment-grade bonds, not out of fear, but out of necessity because of low yields, and moving into higher yielding bonds and emerging markets debt.

Nikolaos Panigirtzoglou et al at JP Morgan said the gap between individual investor flows into bond mutual funds and ETFs and those focused on equities widened to $70 billion in June as retail investors embraced the Great Rotation over the past 2 months – the biggest behavioral change by retail investors since the Lehman crisis. JPMorgan said US pension funds and insurance companies have been steadily increasing equity allocations and lowering bond allocations since Q3 2011, accelerating in Q1 2013.

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