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Russell Investments hedges bets after six-year bull run

Russell Investments Multi-Asset Growth Strategy Sterling manager David Vickers says now is one of the most difficult periods for running money in his career to date.

His multi-asset strategy is a diversified growth fund that aims to provide a real return of 4 per cent above the Retail Price Index.

“It’s one of the most difficult times of my career to manage money because I look around and I can see relative value but I can’t see absolute value,” he explains. “We are not relative return and have some boundaries about what we can invest in, but they are exceptionally wide.”

The fund hopes to catch more of market upside than it does of market downside.

“When you strip back what any investor wants, they want income and they want growth and capital preservation,” he says. “What we wanted to get away from is going to our clients and saying, ‘we’ve done a good job: we’ve beaten the benchmark and beaten the peer group, but you’ve still lost 15 per cent’.

“That doesn’t pay your bills, feed your children or help you with the mortgage.”

Instead, the team tries to mitigate maximum drawdown.

In July, the portfolio bought a “bear put spread” on the S&P 500 with a December strike price of 1,975.

The derivatives gain value when the market falls because they can be used to sell at a higher level than the market price. The fund recently sold some of the contracts during a market contraction for an almost 45 per cent gain, which helped to smooth some falls in other parts of the portfolio.

While Russell expects the markets will “grind higher”, Vickers believes it was prudent to introduce a hedge in case the phenomenal growth of the past six years reverses.

Earlier this year the fund lowered its bond duration risk and shifted money toward strategic bond strategies run by Bluebay, Lazard and Legg Mason subsidiary Brandywine.

Ten-year gilts tightened unexpectedly this year, dropping from a peak of 3.07 per cent in December to 2.23 per cent last week.

A long-only volatility derivative strategy has been implemented to make money as market ructions increase, dampening the fund’s susceptibility to the phenomenon, Vickers says. Jitters over the Federal Reserve’s end of tapering and rate hikes could “easily” cause a 10 to 15 per cent drawdown in equities, he says.

Quickly into Japan

Japan is one of Vickers’ favourite areas and the fund took some currency-hedged derivative exposure to the Nikkei because he wanted to enter the market quickly.

Over time he will swap out the futures for Japan funds, with a bias to those that are domestically focused.

“If inflation is going to take off in the country, it will take off for those domestic names.”

The market has been “choppy” but it has expanded about 6 per cent since the fund bought in. Property is not held in the portfolio, as the team does not like the idea of holding illiquid assets within a liquid Ucits structure.

If investors want illiquid property exposure – or hedge fund or distressed debt – they can get that outside of the cornerstone investment in the fund, Vickers explains.

The fund does hold some property Reits within the global equity allocation, however. Three per cent of the fund is held in the Jefferies Asset Management Commodities strategy, half that of a year ago.

Convertibles are to be added to the fund soon although exactly which fixed-income exposure will be reduced to make way is difficult to determine due to fluctuations in the market, he says.

Vickers may take profits from the “top of the range” equities or cash, he adds.

Adding to European asset-backed securities – particularly Spanish – has been a good performer, with the fund holding 3 per cent in the debt, he says.



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