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Are you positioned for a correction? We ask three wealth managers

There is real concern there is too much complacency in markets. We hit wealth street to find out how three readers are protecting their portfolios.

Bull breaker

The S&P 500 has broken 2,000 for the first time in history in the dash for risk assets.

This surge has been motivated by the ultra-low interest rate environment and quantitative easing. But as the Fed starts to taper its monetary injection and interest rates, on both sides of the Atlantic, likely to go up at some point in the near future, should investors be employing a more conservative strategy?

We ask three readers how much cash they are safeguarding.

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Jim Wood-Smith, head of research, Hawksmoor Investment Management, Exeter

‘Why is it that a fall in the market is always called a “correction”? It is as if the starting point was necessarily wrong. However we have been expecting equity markets to have a wobble for some time, so the past month’s falls are long overdue.

‘We had become progressively more cautious over the course of the second quarter of the year as market valuations rose without any great support from earnings and we see the falls in share prices as both healthy and welcome.

‘Summer soft spots have become a regular feature and markets tend to overreact to events during the holiday season, but the drops in prices thus far have not yet been enough to make us want to start raising equity weights again. Valuations do not yet have a margin of safety.

‘We like to run portfolios that are near to fully invested and have a 4% cash weight in our Balanced Moderate Risk model, though this is up from 2% at the start of the second quarter. Our safety buffer has been via our successful 44% weight in bonds and alternatives.’

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Paul Abberley, chief investment officer, Charles Stanley, London

‘We look for equity market corrections from three sources: sentiment, valuation and fundamentals. Price action in August suggests sentiment remains robust, despite geopolitical uncertainties.

Valuation seems broadly fair in absolute terms and equities appear quite good value versus other assets classes. But fundamentals represent the key risk: is underlying economic growth underpinned sufficiently to support earnings growth? Recent data from around the globe suggests we are losing momentum, and if conviction fades in the autumn, markets are vulnerable to correction. While this implies portfolio market exposure should be tempered, we recommend achieving this via absolute return strategies and commercial property, rather than building cash.’

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Tim Gregory, head of global equities, PSigma Investment Management, London

‘We have been operating with more cash than normal over the summer months because, due to recent movements in the market, we believe there is more reason to be cautious and therefore it is appropriate to take a step back.

‘We took some profits out of our European positions and as well as Japanese equities. Japanese equities had a poor start to the year after a very substantial rally.

‘Last week, equities were up 1.5% in the US so they have moved to more neutral territory. We believe a further pullback is possible in the autumn hence why we are already preparing portfolios and we expect to stay in this position for the short term.

‘Strategically however, we still see equities as the asset class of choice when sovereign bond yields are so low and there have been such big moves in other asset classes such as high yield credit in recent months.’

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