iFunds Asset Management is maintaining short positions in a variety of equity market indices within its multi-asset funds, believing further falls are around the corner.
The firm, which runs multi-asset and model portfolios, has been dialling down its equity risk over the past six months.
In March the medium-risk Thesis iFunds Spectrum Green portfolio’s long exposure to equities stood at 85 per cent. But investment manager Stacey Ash said he had subsequently been building up cash levels to as much as 45 per cent as of July.
At this point the firm began shorting a number of equity markets via exchange-traded funds (ETFs).
The iFunds Spectrum Green fund now has a 10 per cent exposure to the db x-trackers FTSE 100 Short Daily ETF, and 4 per cent in the Euro Stoxx 50 Short Return Index ETF. The portfolio also has a 6 per cent short position in commodities.
Mr Ash said the move had benefited the portfolios during August’s market turmoil.
He said: “What happened [after the changes were made] was we had a dash from equities through August. We started to see the prices deteriorate.”
The fund now has just 1 per cent in cash, with the remainder in bonds. Just over 50 per cent of the Spectrum Green fund is invested in the Barclays Capital UK Gilt 1-5 years Sterling Bond index, for example.
The remainder is split between a 10 per cent allocation to the iShares GBP Index-linked Gilts ETF and 10 per cent in the SPDR Barclays Capital 15+ year Gilt ETF.
Similar moves have been made in the firm’s other two multi-asset funds and discretionary fund management portfolio range.
“Clearly investors were rushing towards bonds in August, despite what was being written about interest rates. People rushed to the traditional safe haven,” Mr Ash said.
iFunds’ quantitative process analyses 34 asset classes and ranks them by relative strength based on price momentum and volatility.
The team then uses ETFs to invest in what it deems the top 10 asset classes, buying the new entrants according to its rankings and selling those that have fallen out of favour. The weighting to each asset class is based on its volatility level and the risk profile of each fund.
Speaking last week as the FTSE dropped below 6,000 points, Mr Ash said market sentiment indicated he was right to maintain his short positions.
He said: “The market’s telling us it’s not safe going back into the water as far as equities are concerned.
“At the moment it is telling us that the recovery we had was a bit of a false dawn.”
Over three years the Thesis iFunds Spectrum Green fund has returned 27.8 per cent, compared to a 20.4 per cent average return for the Investment Association Flexible Investment sector, according to FE Analytics.