Fund managers have reduced their holdings of U.S. stocks to the lowest level in seven years, according to a survey by Bank of America Merrill Lynch.

Meanwhile, cash levels are the highest in 10 months, an indication of caution among funds that invest in U.S. and global markets, the bank said. Funds began holding more cash after the Federal Reserve said it would begin tapering its bond-buying stimulus program.

“Fund managers have been running high cash levels since the May 2013 ‘taper tantrum,’ thus revealing latent rate fears,” Michael Hartnett, chief investment strategist at BofA, said in a May 19 report obtained by Newsmax Finance. “Driven by the recent U.S. dollar setback, investors clipped extreme positions in May.”

Fund managers in May reduced their U.S. equities to 37 percentage points fewer than foreign holdings, the lowest since January 2008, as the S&P 500 stock index reached record highs. The index has risen about 13 percent in the past year, with particular strength in technology, health care and consumer discretionary stocks.

But fund managers say they unloaded consumer staples and discretionary stocks, while buying up shares in beaten-down energy companies, according to BofA's survey. The energy and materials industries had weakened with the price of oil and commodities as the dollar strengthened on expectations for higher interest rates.

“Global tech is once again the most popular sector in the world, overtaking consumer discretionary,” Hartnett said. The allocation to consumer discretionary fell from record levels of 45 percent net overweight to 31 percent, the first decline in nine months.

About 45 percent of fund managers say bullish positions in the U.S. dollar are the most “crowded trade,” followed by U.S. junk bonds and European stocks, according to BofA.

As for the global economy, 70 percent of asset managers have high expectations for growth, while only 11 percent expect weakness. They also don’t foresee major risk from geopolitics, China debt defaults, Fed policy failure or stock bubbles, BofA said.

Forty-five percent of survey respondents expect a rate hike in the third quarter of this year, while 36 percent foresee a fourth-quarter increase. The percentage of survey respondents who expect a rate hike during the second quarter of this year fell to 5 percent from 49 percent in October, BofA said.

The bank surveyed 208 fund managers who oversee $607 billion in investments.

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