Russell Investments: ‘This is the most difficult time to run multi-asset funds’

Vickers David Russell Investments

Russell Investments portfolio manager David Vickers says multi-asset managers face severe headwinds over the next 12 months as investment opportunities remain limited and a continued lack of liquidity raises the risks associated with equities.

He says the managers who will survive next year are the ones who preserve capital.

He says: “This is the most difficult time to run multi-asset investments because the playing field for opportunities is so limited. Your risk assets are expensive and your risk-free assets are also expensive and there is a lot of illiquidity in the market that is not yet realised.”

The lead manager of the £4.6bn Multi Asset Growth fund, which he has been running since 2012, drastically reduced the fund’s equity exposure from 60 per cent in 2012 to 37 per cent in May,  reallocating some of those resources “as a protection” to convertible bonds, as well as US treasuries and cash.

He says: “When I started in the company we were relatively positive on risk assets. In 2014 we were positive on equities but because of some episodes through the year we added some convertible bonds as they had a big sell-off and were cheap. We put a fair amount of them into the portfolio and have outperformed equities ever since.”

The fund manager likes convertible bonds as they have “a good level of convexity”, meaning if the equity market rallies “they also enjoy some of that upside”.

The fund has a 3.2 per cent exposure to the BlueBay Global Convertible Bond fund and 5.9 per cent in the Salar Convertible Absolute Ret-urn fund. Vickers says this year he found valuations “unattractive” and was concerned about business cycles, especially in the US.

He says: “People got quite greedy throughout the year and sentiment was high, so they were putting money into the market. When you have that it makes sense to take money out of equities. Next year, even if you get a positive return, which we are predicting, the returns on offer are quite low and the risks are large.”

In March, the team also reduced US small cap exposure to zero and had no emerging markets exposure, shielding the fund from the uncertainty enveloping China and the surrounding economies. However, after markets fell the team boosted equity exposure from 37 per cent to the current 39.4 per cent.

Vickers says there are still “great opportunities” in European and Japanese equities but not in the US, which remains expensive, or emerging markets. However, emerging markets are getting “more interesting”, he says. He still prefers East Asia and avoids “anything that is a commodity exporter” in the region.

He says: “Japanese and European margins look like they were before the crisis. There is a lot of scope to improve margins and therefore to improve earnings.”

Vickers says there is a high probability of a US rate hike in December, but believes the Federal Reserve might continue to raise the rate next year. He says: “One prediction is that they will just do one hike and  that would be the best scenario for risk assets. Or they could do one and then another three hikes during the year and that would be bad for equities.”