However, the predicted pick-up in volatility has since materialised as, according to FE Analytics, the UK equity market has now fallen by more than 7 per cent since early September leaving the FTSE 100 hovering around 6,350.
Performance of index since 3 Sep 2014
Source: FE Analytics
Keith Ashworth-Lord, manager of the five crown-rated Premier ConBrio Sanford Deland UK Buffettology fund, had built up his money market weighting to 13 per cent over the summer due to his concerns about valuations.
However, he is now putting that cash to work and when asked whether he has viewed the recent fall as a buying opportunity, Ashworth-Lord (pictured) said: “Yes, most certainly. I love bad markets when I have been husbanding cash. The contrast with the last six months is striking. I’ve spent all summer sitting on the sidelines and refusing to chase valuations.”He added: “Now I’m starting to find some real value.”
Though the manager is certainly more bullish than he has been, he still hasn’t bought any new companies this year and is still not fully-invested.
This more cautious positioning has enabled Ashworth-Lord to shield his investors from some of the recent market falls, as his fund is top quartile in the IMA UK All Companies sector since September with losses of 5 per cent.
This has contributed to his fund’s longer-term outperformance which, according to FE Analytics, has been a top decile performer in the sector since its launch in March 2011 with returns of 49.1 per cent.
Performance of fund vs sector and index since Mar 2011
Source: FE Analytics
Ashworth-Lord is, however, looking to buy more over the coming weeks.
“I am still sat on 6.3 per cent of the fund in cash and I also have a cash takeover in the portfolio accounting for another 3.5 per cent of the value of the fund at present; so still almost 10 per cent of the fund in dry powder.”
“If we can just enjoy a few more weeks of this doom and gloom I may even get the cash fully invested. I just hope our investors realise that bad markets are always the time to make the best returns and they don’t get ‘faked out’ of their holdings by following the herd.”
Julian Chillingworth, Alexandra Jackson and Joanne Rands – managers of the £75m Rathbone Recovery fund – have also been putting cash to work during the correction.
They had held 9.5 per cent of their fund in the money market and while they cannot name names, they have been using that cash to target certain areas of the market.
“We have been focusing on businesses that are demonstrating self-help as a way to protect against the more recent macroeconomic headwinds,” Jackson and Rands said.
“In this environment, backing management teams that are capable of steering through such soft patches has become even more important. To this end, we are building positions in two very different companies, both of which are in the diverse support services sector, that we believe fit this bill.”
Not all managers think the recent volatility signals a significant buying opportunity, however.
Robin McDonald and FE Alpha Manager Marcus Brookes have built up very high levels of cash across their Schroder MM range over recent months as not only are they concerned over equities, but they also want minimal bond exposure.
The most extreme example is their five crown-rated Schroder MM Diversity Tactical fund, which has a 44 per cent cash weighting.
This positioning has meant that the fund has underperformed against the IMA Flexible Investment sector in 2014, though it shielded its investors better than most in the recent sell-off.
Performance of fund vs sector in 2014
Source: FE Analytics
Despite that, a spokesperson from Schroders said the managers weren’t starting to invest yet as they expect the market to continue to fall over the short term.
James De Bunsen, who holds 19.3 per cent cash in his and FE Alpha Manager Bill McQuaker’s Henderson Multi Manager Diversified fund, agrees with that view.
“We already had a fair amount of cash coming into it and at some stage we’ll look to deploy some of it. At the moment we still think we might get a better entry point though,” De Bunsen (pictured) said.
The major reasons why managers are still cautious include concerns over slowing global economic growth and growing geo-political tensions in the Middle East and eastern Europe.However, the most imminent issue is how financial markets will cope when the Fed eventually ends its quantitative easing programme at the end of the month.
The BofA Merrill Lynch Fund Manager Survey for October showed that 32 per cent of managers expect the global economy to strengthen over the next 12 months as QE ends – which is the lowest reading in two years.
The study also showed that the average cash balances on funds have risen to 4.9 per cent this month, rising from 4.6 per cent in September.
However, while managers may be looking to keep a cautious portfolio Stephen Ford, head of investment management at Brewin Dolphin, says private investors should think twice about holding a high level of cash at the moment.
“Being scared to invest can be the riskiest strategy of all. Coming rate rises are expected to be gradual and cash only savers are losing out, ironically, because they are so scared of losing out from stock market volatility,” Ford said.
“There’s no substitute for a properly diversified portfolio that will help your assets to keep abreast of inflation, and cash savings should be just part of that.”