British funds raise cash to five-month highs, brace for Brexit: Reuters poll

LONDON (Reuters) - British investors have raised the share of cash in their portfolios to five-month highs, bracing for any market turmoil from a possible "Brexit" vote at next month's referendum and interest rate rises in the United States.

They also cut their exposure to UK equities by two percentage points in May to 26.7 percent, or the lowest since February, according to a Reuters poll. The latest monthly survey of UK-based funds was conducted between May 16-25.

While betting markets suggest that Britons will opt to remain in the European Union at the June 23 referendum, and opinion polls now show the "Remain" camp with the upper hand, fund managers seem to be taking no chances.

A Bank of America Merrill Lynch survey found this month that holdings of UK equities were at 7-1/2-year lows and data this week showed that the very uncertainty fueled by the referendum run-up had caused a fall in British business investment for the first time in three years.

All those fears are being amplified by the global backdrop of sluggish economic growth and the expectation - held by all those who responded to a Reuters question - that the U.S. Federal Reserve will raise interest rates this year.

"Markets are prone to shocks over the summer," said Trevor Greetham, head of multi-asset at Royal London Asset Management, adding he was underweight U.S. and UK equities despite a moderately positive stance on stocks as a whole.

Broadly, the share of equities in funds' balanced portfolios remained stable, thanks to an increase in exposure to U.S. and euro zone markets, which came at the expense of the UK.

Overall bond and cash allocations rose by around one percentage point each, the latter standing at 8.8 percent.

Investors acknowledged that the referendum may also provide opportunities and Greetham said he saw the greatest opportunity in an overweight sterling position.

"While the markets may be factoring in a Remain vote, they are not factoring in the economic consequences of a Remain vote - namely a pick up in business and consumer confidence and the start of base rate hikes, possibly as early as November," he added.

But fund managers were cognizant of other risks dogging world markets - the U.S. presidential election in November, higher U.S. interest rates, poor corporate profitability and weak growth in the developing world and the euro zone.

Business growth in the euro zone bloc slowed to 16-month lows in May, with weakness concentrated in the smaller peripheral economies.

"Contagion risk into Europe is a significant risk in our view: specifically the Brexit vote will likely give rise to more calls for referendums in other nations which could undermine the stability of the Euro project," said Sacha Chorley, a portfolio manager at Old Mutual.

(Additional reporting by Claire Milhench)