The search for portfolio insulation
Justin Oliver, deputy CIO at Canaccord Genuity is one who agrees that an increase in volatility is inevitable, but says, “outside of elevated cash levels, it is also difficult to pinpoint which assets one might want to target in order to achieve this aim. Ultimately, an aggressive position in any asset class may not be appropriate at this juncture.”
As a result of this, while he believes the time for action is close, he does not yet believe changes to his portfolio are necessary, but when that time does come, the action taken is likely to be toward reducing risk.
Hector Kilpatrick, CIO at Cornelian Asset Management has been taking risk off the table, especially in the equity space. He told Portfolio Adviser that between the third quarter of 2014 and June, the firm had taken around 15 percentage points of equity risk off the table, splitting that money among short-dated gilts and treasuries, absolute return funds and cash.
Another way of mitigating risk, Kilpatrick said was by switching from hedged share classes in his Japanese exposure to local currency funds.
While currency moves have been extreme, and hedging, particularly in Japan, where the yen has weakened so dramatically in the last year, has proven a very lucrative trade, Kilpatrick said, his feeling was the yen couldn’t fall much further.
And, importantly, when unhedged, the currency effect tends to move in the opposite direction to equity prices, and so provides a dampening effect both on the up and the downside, which effectively acts as a risk reduction tool.
Investors are clearly a little concerned right now, and with good reason, as there are a number of issues that could disrupt what is an exceptionally fragile balance. Cash it seems is gaining in prominence within portfolios, as are most other short duration assets and, all eyes seem to shift from one data point to another. A September rate hike could still be on the cards in the US, despite what the IMF believes, but, whatever happens it is unlikely to be a smooth ride.
