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Manager split on risk extends to own investments

David Riley said BlueBay is seeing little reason to lighten up on risk.

Executives at money management firms are not only split when it comes to their views on investors' risk-taking, but also when it comes to their own portfolios.

"We are fully invested — we have reduced cash, we are long risk, overweight credit beta, and we are in the higher-yielding, higher-risk assets within our portfolios," said David Riley, head of credit strategy at BlueBay Asset Management LLP in London. "And the reasons for that is we are in a bit of a sweet spot at the moment — particularly for spread and carry products — because it is low market volatility, growth and corporate earnings have broken higher, and are coming in line with or better than expectations. Inflation is coming in below expectations (and) central bank forecasts, and that means however hawkish central bankers try to sound, the reality is they will be very gradual in removing the ultra-easy monetary policies. We haven't got central banks taking away the punchbowl from the party: it hasn't gotten too rowdy … and although everyone's having a good time there are still a few hours to go," he said.

State Street Global Advisors' Daniel P. Farley, chief investment officer, investment solutions group in Boston, said the firm is "fairly constructive to equities right now" over the short term. However, "it is a cautious overweight because there are a number of things to be cautious about (but) … we have felt it has been worth taking that risk-on (position), and investors so far this year have been compensated for that."

Longer term, Mr. Farley said returns are "probably lower than historically experienced or modeled," which is understood by asset owners. He said the question of risk hedging has come up "more and more from different investors all over the world — we are at a point now where equity markets have been up pretty significantly, folks are concerned it is ahead of itself and how do (they) lock in those gains."

But Ken Monaghan, director of global high yield, Amundi Pioneer Asset Management in Durham, N.C., said executives have reduced risk. "We were a little overweight risk going into this rally, so that has assisted or aided us recently. But looking at where things have moved, we have started taking some risk off the table selectively."

The concern is that while volatility is low now, central banks are still supporting economic growth "and haven't taken away the punchbowl yet, political risk is fading a bit," pricing must not be ignored. "If the market is already pricing all of that in, you are not supposed to be taking extreme levels of risk. We would argue the market is already pricing in all the good news."

If a catalyst emerges to reverse positive sentiment and outlook, Mr. Monaghan said there is potential for "musical chairs. The problem is in the risk markets, whether credit or equities, they don't take away one chair at a time but a whole bunch of chairs … so a whole bunch of people (are) left standing. That's I think the key thing — you have to factor in price — if you are leaving price out of the equation you are missing the point."

Mr. Monaghan highlighted tight spreads in high yield markets as an example to show "it's hard to argue people out there aren't taking a lot of risk."