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Multi-managers avoid the QE market rush

Multi-managers say the Federal Reserve’s decision not to begin tapering its quantitative easing programme is not a reason to pile into markets and reposition portfolios.

Contrary to wide speculation ahead of the announcement, the Fed revealed last week it does not plan pare back its massive QE package which currently sees it pump $85bn-a-month into the US economy through a bond purchases.

The Fed was at pains to reassure markets that the US economy is improving, but concluded that tapering will be held off until more evidence shows  the recovery is “sustained”. Following the announcement Fed chairman Ben Bernanke emphasised “there is no fixed calendar” for tapering.

UK, European and emerging market equities all responded positively to the news. The US market rose to record highs, with the S&P 500 rising 1.22 per cent to 1,725.52 by the end of session on the day of the Fed’s announcement.

Henderson Global Investors multi-manager James de Bunsen argues the Fed’s move was “a big surprise” but this does not mean now is the time to rush into markets.

He says: “We think the moves in gold, emerging markets and government bonds were due in part to some investors buying back their shorts which has led to a spike in prices.

“However fundamentally we do not think the story has changed, rates are still going to rise from here. This is not the start of some new regime of ongoing or increased QE, tapering has just been delayed somewhat.”

As a result, De Bunsen says he does not plan to make any changes on the range of Henderson Multi Manager funds and the portfolios will continue their “very low exposure” to government bonds for the time being.

De Bunsen also highlights that the US market looks “expensive”, with earnings growth necessary to “catch up” with equity valuations. The Henderson Multi Manager funds currently have a “minor” overweight in US equities.

City Financial fund manager Mark Harris says he had anticipated, to some extent,  a “lighter” approach to tapering from the Fed and positioned the City Financial MultiManager range of funds accordingly beforehand.

He says: “We definitely thought the Fed’s language and forward guidance would be very soft and that bonds and equities would rally a bit.

“So it was a bit of a surprise but we had positioned the portfolio in part to hedge out some of the risk that the Fed would take a lighter tone.”

Prior to the announcement from the Fed, Harris increased both the duration across the multi-manager portfolios also purchasing “yield proxy assets” – equities that yield – through the US Dividend Aristocrats exchange traded fund.

He adds: “I hadn’t really been carrying any duration and so we bought US Treasury 10-year futures to increase the duration from basically zero on the fixed income assets when yields were 2.89 or so. That has been very beneficial overnight.”

Harris also says he may look to “put protection over the portfolio” if markets continue to rise around two to three per cent further and yields drop even lower on US 10-year treasuries, to “protect portfolios from corrective action”.

Whitechurch Securities head of research Ben Willis says although the lack of tapering has “buoyed markets” in the short-term, it could lead to increased volatility in the coming months.

He says: “The Fed is going to have to revisit tapering again, creating more uncertainty further down the line.

“Although you could argue tapering has already been priced into bond markets, any mention of tapering could shock markets so I would expect volatility to increase.”

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