Mumbai: Over 73 per cent of the domestic fund managers who participated in a DSP Merrill Lynch survey on mutual funds (MFs) made it clear that preference will now be given to value stocks due to the dampening of growth in the software sector.

"The last time we witnessed this pattern was in November 2002, but reference at the time was only to a marginal degree. Moreover, the linking for cyclical and large-cap stocks continued into April 2003," said the report.

The survey, which was conducted in April 2003, said bullishness in the banking sector continued, in line with the overweight stance on the sector (banks constitute over 25 per cent of the of MFs model portfolio).

A structural shift in lending towards retail assets and the likely non-performing asset recoveries through asset restructuring companies underpin optimism about the sector. There was a reduction in optimism about the auto sector as the truckers' strike, competitive pressures and a weakening rural demand affected the sentiment.

The other sector to witness reduced optimism was the software sector following lowered growth expectations. "We continue to be overweight in the auto sector but neutral in the software sector. Meanwhile, fund managers continue to be largely under weight in the fast-moving consumer goods (FMCG) sector followed by cement and steel. Around 55 per cent fund mangers are expecting the Sensex to be in the range of 3400-3700."

According to the survey, fund managers held a widely shared perception that the markets are undervalued. For almost six months now there have been no skeptics to this theory. Nonetheless, the degree of bullishness has moderated, as only 40 per cent now believe that the markets are undervalued by more than 20 per cent compared with 70 per cent who believed in this view during the last few months.

The survey said cash levels have gone up slightly from last month with 50 per cent holding cash between 6-9 per cent compared with 3 per cent and below last month.