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Jeffrey Hutton is a Morningstar contributor.

Don't let signs of life in world equity markets fool you.

Australian retail investors need to move more of their cash holdings into high-quality debt to cushion against volatile share values, fund managers say.

While the ASX has gained 7.5 per cent since the beginning of the year and the S&P 500 in the US has risen 8.4 per cent during the same period, European debt woes and slow economic growth in the US may undermine confidence and crimp company profits, say debt investors such as Victor Rodriguez, Aberdeen Asset Management's head of fixed income.

As the world's biggest economies stumble, central banks will be forced to cut interest rates further to stimulate growth. That will hurt term deposits.

In a world of anemic growth, debt markets may outshine cash and equities, Rodriguez says.

"Over the next few years, it may make more sense to lend to companies rather than own them," says Rodriguez, who helps oversee some $14 billion in debt assets at Aberdeen.

"We will likely see few of the upside profit surprises that equity markets can tap so well into."

Peter Dorrian, PIMCO's head of global wealth management, says investors must scale back their expectations for growth. Gone are the days of more than 10 per cent equity market gains, last seen ahead of the global financial crisis.

Exposure to debt markets through a balanced fund would have netted gains of between 6 per cent and 7 per cent over the last three to five years, he says.

"We are in a period of low economic growth," Dorrian says. "It's about ensuring your return of capital."

Yields on benchmark US 10-year Treasuries fell to a record low of 1.67 per cent in September last year and recently traded at 1.83 per cent. That shows investors are girding themselves for a period of slow growth, Dorrian says.

"When it comes to allocating assets between debt and equities it's not a case of either/or. They should always be part of a diversified fund."

Cash comprised nearly 27 per cent of holdings among self-managed super funds (SMSFs) in December last year, up from 22 per cent in the year-earlier period, according to SMSF administration services provider Multiport.

SMSFs allocate about 12 per cent of their assets to fixed income, compared with 35 per cent towards Australian equities.

The pattern repeats itself across the whole Australian pension industry - fund managers overlook fixed income compared with their global peers.

By the end of 2011, Australians had amassed more than US$1.3 trillion in pension assets - roughly in line with Canada, which has a population that's 50 per cent bigger, according to a January 2012 study by Towers Watson.