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Managers sell down equities on macro turmoil


Date: Monday, July 25, 2011
Author: Kyle Caldwell, Investment Week

Asset allocators are selling down equities to cut risk exposure as markets digest the EU’s solution to the Greek crisis, and US debt fears persist.

Asset allocators including Skandia’s Rupert Watson are urging their fund managers to take risk off the table and move into cash.

Hedge fund veteran George Soros’ $25.5bn Quantum Endowment fund recently moved to 75% cash, while Jupiter’s Philip Gibbs has almost doubled the cash allocation in his International Financials fund to 45%, with both managers struggling to find value in their markets.

Watson said he is advising Skandia managers to keep their powder dry until there is more clarity on the European sovereign debt crisis.

The group has been overweight equities since the end of last year but has now moved to a neutral stance.

Skandia has also moved overweight cash for the first time in two years, and underweight bonds as yields have hit low levels.

Although sitting in cash brings a significant opportunity cost through being out of the market, Watson said its safety is appealing.

“With all the uncertainty in peripheral Europe, fund managers are in uncharted territory, so it is in the managers’ interests to cut risk and move into cash,” said Watson.

“We have been heavily underweight cash for the last two years as the yields are close to zero, but until there is a clearer picture on what the outcome will be in Europe, it is a safe place to be.”

Troy’s Sebastian Lyon and Barings’ Andrew Cole have also slashed equity exposure and moved into fixed income in a bid to lower their risk profile.

Lyon is running an equity weighting lower than he had at the peak of the financial crisis in 2008 in his £1.2bn Troy Trojan fund.

He has also built up an 8% position in Singaporean government bonds with a maturity of less than a year.

“We allocated some of the fund’s liquidity into Singapore dollars – we also did this to good effect back in 2007/8,” he said. 

Meanwhile, Cole has cut equities by 15% in his Multi-Asset fund and has shifted into government bonds.

He said negative economic data will eventually feed through to earnings expectations and hurt equities.

“Policy headaches, the European sovereign debt crisis and the US debt ceiling will keep investors nervous this summer.

“We have more money in government bonds than in equities to demonstrate how risk-averse we are.”

However, Fidelity’s Trevor Greetham has been boosting exposure to equities within his multi-asset portfolios as he believes sentiment on the asset class is overly negative.

He believes there will be a pick-up in US business confidence and consumer spending, which will benefit equities.

“We have been increasing equities and coming out of cash and commodities to take advantage of poor sentiment,” said Greetham.  

“I have moved 5% overweight equities in my Multi Asset Strategic fund – the maximum overweight is 10% – as we feel investment sentiment has been oversold.”

He said he is aggressively underweight cash with just a 2% position and added the key way to prosper in volatile markets is to avoid trading frequently.

“With interest rates close to zero, managers would have to be bearish to go into cash,” he said.

“When the markets are volatile there is a high frictional cost to trading. So, for example, if you kept changing your mind on Spanish government bonds in the last few weeks, investors would be paying 5% bid-offer spreads.

“The best way to play the market is to not overtrade and instead take a bold position.”