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Q2 WM Outlook: how these readers are managing equity risks
by David Campbell on Apr 30, 2014 at 00:01
Half of all wealth managers had moved to either explicitly or implicitly hedge their equity exposure at the beginning of Q2, as the macroeconomic uncertainties of the last five years began to give way to more tangible concerns about equity valuations, earnings and momentum.
Polled as the tech sector led US indices downward over the first half of April, exactly 50% of correspondents to Wealth Manager’s quarterly survey said they had upped cash, increased absolute return allocations, or directly bought derivative or volatility protection.
Much of the remainder either reported running down equity allocations or reorientating exposure toward lower-beta areas of the equity markets.
Short-term prudence had not yet spilled over into real risk aversion, however. Asked to describe the level of equity risk they were currently running in client portfolios, on a scale of one to 10 where 10 was the greatest, the median response was 6.24.
‘We’ve seen a complete change in the nature of investment risk over a very short time,’ said Alastair George of Hasley Investment Management.
‘Not so long ago, markets were obsessed with economic volatility while low valuations were overlooked. Now, economic risk is much lower but the key risk is in equity valuations, especially for mid caps as US and UK monetary policy normalises, even if only slowly.
‘Our equity portfolios are weighted to large caps where valuations are still reasonable. There’s rather more evidence of over-enthusiasm in the mid cap sector. [We are not actively hedged], we’re just keeping it modest.’
Buying covered calls
Gary Stockdale, principal of Vertem Asset Management, said he had bought covered calls and upped absolute return exposure, while Courtiers chief investment officer Gary Reynolds said he had cut equity beta and purchased put options. Heather Maizels, managing director of Victoria Private Investment Office, has hedged volatility.
‘We have recently added an asset allocation towards absolute return to give us some insurance policy towards future volatility in the equity markets,’ said Peter Lowman, chief investment officer at Investment Quorum. Popular picks included Troy’s Trojan fund and the Darwin Multi Asset fund.
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