Russell Investments’ David Vickers has reached what he claims is the hardest point in his career in terms of selecting investments.
The multi-asset manager (pictured), recently hired from Sarasin, said decisions about where to put money in his fund were becoming extremely difficult given the strong performance of many asset classes.
“Day by day, I’m getting more worried,” he said.
“There have been runs in almost all the asset classes in the past years and so I don’t know where I’m going to put my money next.”
He said the current environment was putting fund managers in “unusual territory”.
“Generally at the end of the business cycle it is best to move into fixed income, but we are still early in the interest rate cycle so I’m positive on equities,” he said.
To deal with the uncertainty of the markets, he is taking defensive measures and using what he calls an “extremely wide toolkit”.
While some managers are putting their money into cash as a temporary holding spot, Mr Vickers has started buying put options – contracts that give the owner the right to sell a specified amount of an underlying asset at a set price within a specified time.
“In essence I can therefore insure my portfolio in much the same way you insure your car,” he said.
“If my car crashes, I get the cost of the car back via the insurance company.
“In this case, very crudely, if the market falls by 10 per cent at expiry of the option, I get that 10 per cent back. There is obviously a cost to this insurance but today it is trading at quite low levels.”
As well as being a defensive mechanism, the use of put options has enabled Mr Vickers to make money. Earlier this year he bought an option at 67 basis points and sold it at 105 basis points.
“The thing is, the optionality ‘insurance’ is cheap when we are due a fallback and then surges after the crisis,” he said.
“Investor behaviour does not make logical sense anymore – they get nervous quickly and act impulsively.”
Mr Vickers believes that post-crisis, investors tend to focus on fearing what they know instead of fearing the unknowns, which are what drive the market.
For this reason he thinks it is important that he “runs against the herd” and is keeping an eye on corporate credit.
“Many people have been pushed up the risk spectrum in search of yield and have found themselves in credit, both investment grade and high yield, at a time when liquidity is much lower than it was,” he said.
“They’ve had a good time, but many of them are still holding these assets.
“I believe that the very low inventory at banks and the lack of exits will create undue selling pressure, much like the mini sell-off we had in high yield earlier.”
