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Managers use market’s dip to boost risk

Russell Investments’ David Vickers

A number of money managers acted on the February market dip to add more risk to their portfolios.

It provided an entry point "especially … for non-U.S. equities, which appear to offer more attractive valuations. Across the M&G multiasset funds, we added to equities in February, having reduced exposure in January when markets were characterized by buoyant sentiment," said Tristan Hanson, multiasset fund manager at M&G Investments in London.

Sources highlighted two records for the S&P 500 in the months running up to the February sell-off: it had gone 310 days without a 3% drawdown, and 402 days without a 5% drawdown.

While executives at Russell Investments did not predict the sell-off, the firm's process indicated a drawdown was increasingly likely. "As such, when the downturn did occur we were positioned to add (to portfolios), but not just because the market had fallen, we don't believe in simple mean reversion," said David Vickers, senior portfolio manager in London. Markets can fall further than 10%, said Mr. Vickers, but the firm's process "allowed us to react rationally. As the market fell, our sentiment indicators moved back to oversold. And we viewed the sell-off as technically inspired, driven initially by higher bond yields and a jump in volatility, which ultimately led to approximately $200 billion of selling pressure from trend-following funds, risk parity funds and other volatility-based funds."

As such, executives added risk back into portfolios. Equity risk was added via emerging markets, dividend futures and call options on the U.S. market, he said. Executives also sold its long-volatility strategy, "which benefited from the spike in volatility."

Goldman Sachs Asset Management's Shoqat Bunglawala, head of the global portfolio solutions group for Europe, Middle East and Africa and Asia-Pacific in London, said executives there reduced equity beta in January significantly within the tactical program. That strategy typically has long-term average beta to equity markets of about 0.3. "We bought into the dip to add equity beta during the week of the stress moving to 0.4 and continue to dynamically manage our exposures," he said.

Legal & General Investment Management's multiasset team added equities, "keeping it diversified so that we weren't placing too much weight on which single market might recover fastest," said John Roe, head of multiasset funds in London. "We also included U.S. tech as a more targeted position as we think that the strong global growth environment we expect will suit it."

Multiasset executives also sold equity protection "as we became more confident in the equity recovery," and added duration in the U.K. and Europe with gilts and bunds, said Mr. Roe.

Others added to portfolios but bought defensive stocks. David Docherty, a U.K. equity fund manager at Schroders in London, bought "a few stocks that are more defensive in nature to the extent they had gone down," adding to existing holdings. "If there should be a scare later on (where) growth and cyclical shares suffer, I would be minded to have a look at those," he added.