Aviva Investors' head of multi-asset Peter Fitzgerald has said he is upping his cash weighting in anticipation of increased turbulence in the first quarter of 2014 following this year's rally.
'Volatility at the moment is at multi-year lows across all asset classes, and our view is that volatility will probably increase,' he said.
In the last three weeks, he has prepared for this by reducing the equity overweight in the retail multi-asset portfolios from 10-12% to 8-10% and also increasing his underweight to fixed income. These proceeds have been ploughed into cash, which he is looking to hold through the volatility, with some portfolios in November holding as much as 12.7% in the asset class.
'There are a lot of risks building up in equity markets and even more risks building in fixed income,' Fitzgerald suggested, adding that he thinks the equity market could drop by as much as 15-20%.
On the fixed income side, the team has no exposure to gilts or UK investment grade bonds in its portfolios, which Fitzgerald said is 'a radical approach to our competitors, but not a radical approach to common sense.' Instead, he is gaining exposure through floating rate securities to protect the portfolio from interest rate rises on the horizon.
'We have a wonderful ability as humans to forget the past. We have forgotten what it was like to build portfolios in an environment where interest rates were rising. It's not normal for interest rates to be at zero,' he said.
Elsewhere, one of the key questions for 2014, Ian Aylward, head of multi-manager research said, was whether developed markets could continue their dominance over emerging markets.
He thinks that they can, and the team is geared towards a continued recovery in Europe, and also a strengthening US.
Aylward noted that currently it seems the markets' taper tantrum has given way to an acceptance that less quantitative easing is a positive sign of a heathy economy, rather than a cause for panic.
'For the first time in a long time, good news is good news. When we see good news out of the US, that would make tapering more likely, equities actually rise,' he said.
But Aylward said that if tapering does happen next year as predicted, he would then look to up exposure to emerging markets if the market reacted badly.
'Emerging markets have already underperformed by a substantial amount, and that for us would be the time to revisit,' he said.