Discretionary fund manager London & Capital has reduced exposure to equities and commodities in its managed port-folios because it expects volatility to rise.
Executive director (investment strategies) Neil Michael says he has turned down the risk dial on the portfolios as part of a tactical asset allocation change.
L&C wants to be seen by advisers and clients as a safe pair of hands so rather than chase performance at all costs, it battens down the hatches by increasing exposure to cash. Risk is taken off the table in this situation by reducing exposure to equities and commodities, which the firm sees as risky assets because they are hit first when volatility rises.
Money taken out of risky assets is held temporarily in cash, then goes back into equities and commodities when L&C’s analysis signals a likely fall in volatility. At this point, the fund is able to benefit from picking up stocks at cheaper prices.
The decision to reduce equities and commodities was based on factors including the strong rally in markets, a fall in volatility, tightened monetary policy in China and spikes in the price of oil and commodities.
Michael says long-term bond yields increased against this backdrop, leading to an increase in interest rate expectations and a tightening of monetary policy.
This hurt the peripheral European countries, leading to sovereign debt problems, while inflation risk in the UK has caused bond yields to rise.
Michael says: “The experience is worse because of events in Japan, which could be negative for economic activity. The recovery of global activity could slow as a result of the tragedy.”