The possibility for higher volatility is a "present danger" and one that investors need to think about in terms of their portfolios’ exposure, Jason Borbora, assistant portfolio manager of the Investec Diversified Income fund has warned.
Asked whether advisers’ clients should expect more market volatility in 2019, or whether volatility worries were overblown, Mr Borbora said: "The reality is I think volatility is here at the moment and people have to deal with that now, particularly if you look at downside risks, which we ultimately concentrate on more than the simple volatility number."
He told FTAdviser: "Investors, we think, shouldn’t be too concerned if their portfolios are going up in a random fashion, it’s more if they start to fall in a random fashion."
Mr Borbora pointed out that in 2018 there were 25 days when the S&P 500 index closed down more than 1 per cent, compared with just four days in 2017.
The portfolio manager suggested there had been a "big shift" in investor dynamic recently.
He said: "Historically, if you bought the equity market following a week of negative returns you would make a good forward return. That performance dynamic has now reversed.
"Similarly, we find the correlations between government bonds and equities have risen. That was a dynamic that was, in fact, present throughout the majority of the 1980s and 1990s and it came to the fore again in October [this year] in which government bonds lost price value at the same time as equities did.
"We find ourselves in our portfolio managing to produce a positive return in October, not through owning government bonds, but actually through having hedged our government bond exposure as well as our equity exposure."
Mr Borbora also warned income had been in "fewer and fewer places" this year.
Asked whether he expected to have a broader investment universe to choose from anytime soon, he admitted "in all honesty, I don’t think that will necessarily be the case".
The portfolio manager added: "We find ourselves in the fortunate position of being bottom-up orientated that we can look through each asset class and take from it the most attractive securities to us.
"We’re not struggling to find a sufficient number [of securities] to feel adequately diversified but equally we’re not finding ourselves with an embarrassment of riches from which to choose and primarily that is because of the dynamic of there having been such a significant rebalancing effect within investors’ portfolios from the lowering of interest rates following the financial crisis."
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eleanor.duncan@ft.com
