Investment trust companies have slashed their cash holdings this year to take advantage of investment opportunities, in a sign of growing optimism among managers.

The financial sector has been the biggest beneficiary of investment company cash, following an upturn in sentiment towards the sector this year.

Investment companies specialising in financials had nearly a third of their assets in cash at the end of 2008 - now, they have just 10 per cent in cash.

More than half of the investment company fund managers surveyed by the Association of Investment Companies reduced their exposure to cash and fixed interest between December 2008 and May this year.

Sectors with the highest inflows of investment company cash were those hit hardest by the credit crunch, according to the AIC. As well as financials, property securities and global emerging markets funds reduced their cash holdings significantly.

“It is clear that the market has failed to distinguish between bad banks that have run up huge losses, and quality, well managed banks with positive earnings growth, and it is these quality, yet grossly oversold, stocks that we have invested in,” said Shaun Miskell at Blue Planet, whose investment companies are among the most bullish.

However, a third of investment companies had actually increased their holdings in cash and fixed interest, while 14 per cent had not changed their asset allocation.

And analysts at Oriel Securities warned that many investment companies are looking expensive on discount terms. Discounts of investment company share prices to their underlying net asset values have narrowed significantly this year with the stock market recovery.

Oriel analysts believe there could be a sell-off in the near future, which would widen discounts further.