Worried about a further downturn in global markets, Cornelian Asset Management has de-risked its portfolios, dumping all but one of its passive holdings and raising cash levels.
At the end of August, Cornelian’s exposure to passives included positions in the MSCI Japan ETF and MSCI Europe ex UK trackers from iShares and the Vanguard S&P 500 EFT. But the firm has since sold out of the two iShares trackers and reduced its position in the Vanguard fund.
Hector Kilpatrick, chief investment officer (CIO) of the Edinburgh-based discretionary manager, said the group uses tracker funds to make tactical decisions. As such they are normally the first things to change when Cornelian is making asset allocation calls.
The manager has also drastically reduced his allocation to Japan. About a month ago, his portfolios held as much as 30 per cent in the country, but this is now down to 11 per cent in the £56m Progressive fund, the vehicle with the highest risk among his five portfolios. He added he is “fighting an instinct not to put it to zero”.
Mr Kilpatrick is worried that Japan continues to rely on exports, which he sees as dangerous at a time when regional trading partners are at risk of an emerging markets credit crunch. He thinks the reforms of Japanese prime minister Shinzo Abe, aimed at boosting the country’s economy, “could easily unravel”.
Mr Kilpatrick said he is prepared to reduce his Japan positions further if he sees evidence of emerging markets suffering more severely.
The money from the tracker funds and Japan has mostly gone into cash. In Cornelian’s Defensive fund, which holds the least amount of risk among his portfolios, there is 11.6 per cent in cash, while the Progressive vehicle has 7.4 per cent in cash.
As he pared back his Japan exposure last month, Mr Kilpatrick said he had considered reinvesting elsewhere given the widespread falls in equity markets.
But he thinks stocks have further to drop. The CIO’s prime concern centres on a manufacturing crisis in the US. He noted that sales are failing to keep pace with inventory rises in the sector, and anticipates earnings downgrades in the next reporting season as a result, which could then have a knock-on effect on the wider economy.
If this happens, Mr Kilpatrick said investor confidence “will be knocked”, though he held off from predicting a full-blown recession.
The CIO added the group’s equity allocations across its portfolios are currently running at record lows. According to Mr Kilpatrick, in his Progressive fund the equity allocation is at 71 per cent, whereas it has been as high as 98 per cent.
De-risking the portfolios has, however, helped protect the funds during a volatile period. In the year to September 14, the Progressive fund returned 1.6 per cent, while the MSCI World index lost 2.4 per cent.