Some, such as Gervais Williams, manager of the CF Miton UK Multi Cap Income and CF Miton UK Smaller Companies funds and the Diverse Income Trust, and just this week appointed to co-manage the Psigma Income fund alongside Bill Mott, have been buying protection in the shape of puts.
Williams currently has a put option against the FTSE 100 on around a third of both the Diverse Income Trust and the UK Multi Cap Income fund which expires in June 2015. “Markets have done pretty well over the last five years,” he said. “We’ve got to a stage now where people are pretty comfortable but unexpected events do happen. The great advantage of the way markets are now is the cost [of portfolio insurance] has come down. That is the opportunity for us.”
Williams said the cost to clients is around seven or eight basis points a month. “You’re buying [protection] at a low level with the market high. If markets do well, something good happens, but the market could get caught out by something going wrong. At that point we can sell the option and buy income generating assets at a time when the market is depressed. Investors will then enjoy a more rapid growth in income. Any extreme event is good news. It’s costing clients a bit but there are lots of opportunities to add through stock selection and hopefully add more than seven or eight basis points.”
Other managers, though, do not see buying protection as part of their remit. If they see fewer opportunities, or a market correction looks likely, upping their weighting to cash can be employed as an alternative strategy. As at the end of October, Alastair Mundy’s Investec Cautious Managed fund had 24% in cash and short-dated government bonds, up from 19% a year ago and 15% two years ago.
“Our exposure to equities has been cut, from 55% to 35% over the past year,” said Mundy (pictured). “Many of our existing holdings have become fully valued at a time where we have found the current cohort of out-of-favour stocks to be less than compelling. Under such conditions, our preference is to be patient, allowing our liquidity levels to rise rather than chasing sub-optimal investments, giving us plenty of firepower as and when better opportunities present themselves.”
Some fund managers, however, have actually reduced their cash allocation. Brevan Howard, via the Brevan Howard Global Opportunities Master fund, held just 1.2% of the portfolio in cash at the end of October.
