First came FE Alpha Manager James Sullivan, who said in January that the recent surge in markets was "a false dawn". Then came Fidelity’s Jeremy Podger, who said a correction was "only a matter of time".
Since then we’ve had Troy’s Francis Brooke warn that bullish investors have got ahead of themselves, while both Fidelity Special Sits manager Sanjeev Shah and Close Brothers’ Chris Bailey say they have become more defensive, in anticipation of a softer period for risk assets.
These managers have looked to protect their portfolios against these risks, but what about the everyday investor – what can they do to minimise losses, if they too think the recent surge in markets will soon come to an abrupt end?
Head of research at FE Rob Gleeson looks at the options available to such investors.
Do nothing
"This might not sound like a solution, but often doing nothing is the best thing you can do," said Gleeson. "If you’re a long-term investor and are confident in your funds, you might be best off riding it out."
"I’m not doing anything. The market is very difficult and even the very best managers have got it wrong in the past."
"If you look back at the Lehman crash, it only made a small dent in returns over the long-term, and investors made back their money very quickly. It’s just as hard knowing when to put your money back in as it is taking it out in the first place."
Performance of indices over 10-yrs
Source: FE Analytics
One of the highest-profile market timers of recent years is FE Alpha Manager Martin Gray, who anticipated both the dotcom crash and 2008 financial crisis.
However, his CF Miton Special Situations Portfolio has underperformed over the last three years, because he failed to participate in the rising markets of 2010 and 2012 because of his defensive positioning.
FE Trustnet will take a closer look at this fund, as well as some others that are well positioned to protect against the downside, in an article later on today.
Go fully into cash
"If you’re confident the markets are about to fall, you might want to take all of your risk off the table," said Gleeson.
"There are certainly benefits of doing this. If the market falls, you’re fully insulated, and even if you’re wrong you haven’t actually lost anything. You can always buy back in if you want to three months later."
Switching all assets into cash or a money markets fund would have worked very effectively in all the falling markets since the turn of the last millennium, according to FE data.
The IMA Money Markets sector average comfortably beat the MSCI World index in 2000, 2001, 2002, 2008 and 2011.
Calendar year performance of sector and index
| 2011 (%) | 2008 (%) | 2002 (%) | 2001 (%) | 2000 (%) | |
| IMA Money Markets | 0.14 | 2.18 | 2.16 | 3.59 | 4.36 |
| MSCI World index | -4.84 | -17.9 | -27.57 | -14.63 | -6.33 |
Source: FE Analytics
As well as once again highlighting the difficulty of market timing, Gleeson says trading fees are one potential drawback of this strategy.
"It all depends on how you are buying and selling, as some platforms waive certain fees, but you don’t want to be switching in and out of funds and into cash if you’re paying a 5 per cent entry charge every time, as this can have a big impact on your long-term returns," he said.
Gleeson also points to the fact that some fund groups charge exit fees.
Switch into an absolute return fund
Gleeson says this is an option for investors who want to minimise their downside risk, while still holding on to some upside potential.
"You do have to be careful with absolute return funds, because not all of them do what you’d expect of them," he explained.
He rates both Standard Life GARS and Insight Absolute Insight, which are both members of the FE Select 100.
"Some of the market-neutral funds have also been very effective. These use a pairing system, where they go long one stock and short another; for example, they might go long on a bank and short on an insurance company."
"When it works, this eliminates all market risk; however, you do get some situations when [the wrong stock goes up/down.]"
Among the most effective market-neutral funds of recent years is Insight Absolute UK Equity Market Neutral, which has delivered positive returns in every calendar year since inception.
It has beaten both cash and inflation since its launch in October 2007 and has been less volatile than the average UK gilt fund.
Performance of fund vs indices since launch
Source: FE Analytics
FE Trustnet will take a closer look at the fund in an in-depth study later on today.
Short the index
"This is the extreme way of looking at things, but it’s certainly an option," continued Gleeson. "If you’re confident the markets will fall, this is a way of not only protecting against the downside, but making money in the process."
Gleeson points to a number of different ways investors can short the market.
"You could put an option on an index directly, but this can be very expensive and there aren’t many places where you can buy them as a retail investor," he said.
"You could also use an inverse ETF, which means that essentially you’re betting on an index falling."
One option is the DB X Trackers FTSE 100 Short Daily ETF. As the graph shows below, it has a very strong inverse correlation to the index.
Performance of ETF and index since launch
Source: FE Analytics
"Some absolute return funds – such as Insight Absolute Insight and GARS – have shorting strategies, but the UCITs model makes it very different for funds to have a significant shorting bias," continued Gleeson.
"There are also some investment trusts of hedge funds, which use shorting more extensively."
Among the best-known of these are the BH Macro and BlueCrest Allblue ITs.