Invesco Perpetual’s Global Targeted Returns team has been actively avoiding market bets in order to bulk up downside protection, blaming high valuations and macro uncertainty for their caution.
David Millar, who runs the £11bn fund with Dave Jubb and Richard Batty, said a combination of the two factors had driven the trio away from a focus on the direction of individual assets and markets.
Instead, the managers have been using pair trades – matching one strategy against another negatively correlated play – in a bid to limit downside risks.
“We have to try and participate if this [upward movement in markets] is carrying on, but I don’t want to get carried away and swept along,” he said.
“If you look at the risk in our fund, about half of it is in relative value ideas. We have these rather than directional trades.”
In the equity space, Mr Millar has maintained exposure to regions such as the UK and Europe, but used derivatives as protection against a market correction.
“The way volatility in markets has gone lower and lower has been a surprise, but that means protection is cheap,” he said.
“I thought we should carry on with equities, but have some volatility [protection] in case we are wrong.”
The team’s pair trades include longer-term plays on the relative performance of different regions. One of these has been to back French equities while shorting their German counterparts.
Mr Millar explained: “There’s room for France to catch up. There’s a lot of talk about that pro-reform and pro-recovery agenda.”
In another case, the team has backed long-dated bonds in the US and Europe while shorting the long end of the UK bond market, where yields are significantly lower.
“In the UK, yields have stayed very low because of pricing in Brexit. European bond yields have risen and US yields have [also] sold off strongly,” Mr Millar said.
“The gap between European and US yields versus the UK is very wide. If the UK’s okay, bond yields rise, but if things slow, those bond yields will come down.”
The current positioning of the fund has been driven in part by the gains made across a number of asset classes, with the team taking profits and increasing risk protection.
While this has meant using derivatives to offset equity weightings, the managers have taken a more severe approach to the credit portfolio in cases where valuations have increased.
“We have been removing some credit exposure,” Mr Millar said.
“We did have a preference for credit over equities, but in the past year we thought equities have [just] done okay, and credit spreads have come in as far as they have.”
Valuations and, in some cases, market moves have also forced the team to apply greater scrutiny to existing ideas.
“The ideas are normally reviewed almost once a quarter,” Mr Millar added.