It is official: markets are back to their normal selves, as volatility has returned. According to Seven Investment Management (7IM), the year 2017 had the lowest number of days when the S&P 500 moved up or down by more than 1% since the mid-1960s. Indeed, this happened only on eight days last year.
But anyone who thought the low volatility was here to stay would have got a rude awakening from global markets from the end of January. Between 26 January and 8 February, the MSCI World Index fell by 9% in dollar terms. So how are multi-asset managers positioning themselves to benefit from this return of market swings?
Panic-buying pays off
Trevor Greetham, head of multi-asset at Royal London, described the equity markets in December and January as a ‘melt up’, driven by US president Donald Trump’s tax reform legislation. But Greetham said, since the correction, the six Royal London Global Multi Asset Portfolios (GMaps) have bought up equities and are nearly at their maximum weighting for the asset class.
So the GMap Balanced fund was 8% overweight equities at the end of February. Specifically, it has a current weight of 40.5%, compared to 32.5% for the benchmark.
‘When there’s a market panic, it almost always pays to buy,’ Greetham said. ‘You then assess the fundamental picture when there’s the inevitable recovery.’
He pointed out his team has reviewed all the market panics in the last 30 years and found they are almost always buying opportunities. He said: ‘The only time buying was a mistake was during the Lehman Brothers failure, when markets got very pessimistic and went on to fall much further.’
Greetham mainly bought emerging markets and Japanese equities as markets fell. He has also reduced exposure to bonds, which are 5% underweight for the GMap Balanced fund.
Tony Lawrence, investment manager at 7IM, said his fund house was ‘wary’ of the lack of volatility in the market in recent months. He pointed out the return of volatility throws up buying opportunities.
‘As bonds and equities have sold off at the same time, both asset classes gave the opportunity to nibble back,’ he said. ‘We were very underweight bonds. But we have bought a little more as valuations became much more attractive.’
Lawrence added that some of 7IM’s fund holdings took advantage of the early February sell-off by positioning themselves for expected volatility. He cited the Oyster Continental European Selection fund, run by Michael Clements, which is held by all 7IM multi-manager funds.
Clements bemoaned the lack of volatility in previous months and had taken a stake (of between 3% and 4% of the portfolio) in exchange traded product (ETP) provider Flow Traders. This company thrives on high trading volumes in the market, which is a characteristic of volatility. Lawrence said its shares are up around 70% since the end of January.
Avoiding too many tactics
However, Mark Jackson, multi-asset client portfolio manager at JP Morgan Asset Management, retained a broadly unchanged asset allocation after last month’s sell-off. ‘We’ve maintained our equity exposure in broader balanced portfolios because we’re investing for the medium term, rather than thinking about tactical positioning,’ he said. But he did buy a little more equities, which benefited from lower valuations.
Jackson thinks February’s volatility is not outside the norm for any particular year. ‘The fundamental position hasn’t changed,’ he said. ‘So when the market sold off we looked for opportunities to add equities, taking advantage of more attractive valuations. We’ve benefited from that, as markets have moved higher again.’