Fund managers brace for volatility spike
Volatility was unusually subdued, even by historic standards last month, according to analysts at Citigroup.
The firm said the Vix index of equity market volatility was at its lowest ever level for August, with both currency and bond market equivalents also near their respective lows.
Many are now wary of what the traditional September reawakening could bring. Loose monetary policy has been highlighted as one cause of the hush, but a number of central banks will ponder major decisions in the coming weeks.
Eugene Philalithis, manager of multi-asset funds at Fidelity, is among those to have positioned more cautiously in the anticipation that volatility could ramp up.
The manager has taken profits from Asian high-yield bonds, as well as investment-grade bonds in Europe and the UK, and has raised cash levels from zero to around 4 to 5 per cent across his portfolios.
“We normally look to recycle profits into other assets, but the rally has raised all assets and all valuations,” he said.
“Our challenge is where to put the money. Cash is king, which is a bit depressing.”
In another move, Henderson multi-asset team’s Paul O’Connor claimed fears of market complacency were “overplayed”, but has also made recent changes in areas he thought were overcrowded.
This has included selling US investment-grade bonds and gold, and moving into less popular areas such as European equities.
September could bring challenges, or perhaps opportunities, because of a packed agenda of events, including a G20 summit, several central bank announcements and a meeting of Opec member countries.
Onlookers are focused on the US in particular, with Federal Reserve officials meeting later this month.
Expectations of a September rate rise have increased recently, with futures implying a 42 per cent probability of a hike following a speech given by Janet Yellen late last month.
“Most eyes are probably on Ms Yellen and the Federal Reserve and how the US economy performs,” said Aberdeen senior investment strategist Richard Dunbar.
“You can bandy around lots of things investors will think about, but most important is probably the price of money in the US and the performance of the economy.”
Unanticipated events also pose a threat, according to Adrian Lowcock of Architas.
“There could be a leg or two more to this rally, but we could see volatility return,” he said.
“It’s important to have protection in your portfolio to make sure you are well protected against a ‘black swan’ event.”
Meanwhile, equity market valuations remain at elevated levels, prompting some investors to reiterate the case for diversification across asset classes.
Mike Bell, a global market strategist for JPMorgan Asset Management, said the fund house’s multi-asset team had been using government bonds for this purpose, despite record low yields.
“We won’t see more than a 5 per cent gain [for equities] from here to the end of the year but the downside risk is slightly higher than that,” he explained.
“Because of the asymmetry in terms of the potential upside versus downside, we are using government bonds for diversification as we have seen some protection when equities have been weak.”
Mr Dunbar echoed the sentiment if not the specific investment strategy, noting: “Rather than put forward a clever hedging strategy, what it talks to is a balanced portfolio that doesn’t bet the farm on any single bright idea.”
September’s packed agenda
September 4: G20 leaders’ summit takes place
September 8: European Central Bank governing council meeting
September 15: Bank of England Monetary Policy Committee announcement and minutes
September 21: Bank of Japan announces the results of its review of its monetary policy
September 21: US Federal Reserve meeting
September 26: Opec member country officials to meet
September 26: First debate between US presidential candidates
KEY NUMBERS
5%
Level of cash in Fidelity multi-asset range, up from around zero in spring
42%
Recent implied probability of a September US rate hike
