Investors should expect a period of heightened volatility and market falls over the coming months, according to JP Morgan Asset Management’s Nick Roberts, who has raised cash positions across his Fusion range to its highest level since launch in March 2013.
Following a fairly severe market correction in September/October last year following fears of deflation in eurozone, possible rate hikes in the UK and US and the outbreak of the Ebola virus, global equities have been on a strong upward trend.
There have been a number of reasons for the strong gains such as stimulus from central banks in Europe, Japan and China.
However Roberts, who co-manages the JPM Fusion fund of funds range with Tony Lanning, warns that markets have moved too far too quickly. He has therefore been selling down his equity weightings over the last few weeks in preparation for a period of heightened volatility and market falls.
“The cash weighting, depending on which fund you are looking at, varies between 7 per cent and 11 per cent. While it isn’t massive, it is the highest it has been since launch,” Roberts said.
“That is because we started reducing our equities about six weeks ago. We had been pro-risk since 2013 and our cash position isn’t necessarily a bearish call on the market, but more simply [a reflection that] since the market bottomed in the middle of October last year markets have performed very strongly.”
He added: “We just think performance has got ahead of fundamentals.”
According to FE Analytics, every regional equity sector in the Investment Association universe has delivered double-digit gains since the middle of October 2014.
Performance of sectors since October 2014
Source: FE Analytics
As the graph above shows, China funds have been the best performers over that time with gains of 30 per cent – thanks largely to the recent Hong Kong-Shanghai Stock Connect programme, easing from the Chinese central bank and the expectation of further liquidity.
However, the IA China/Greater China sector has been closely followed by funds in the IA Japan and IA Europe ex UK peer groups.
Both markets have been supported by quantitative easing programmes, weakening currencies, improving economic data and huge inflows from foreign investors.
While Roberts is still overweight Europe and Japan, he expects those markets to start to give back some of their recent gains. The manager has also been selling some of his US exposure, given the fact the S&P 500 has delivered positive returns in every full calendar year since the financial crisis in 2008.
The manager says, however, that he would see any significant falls in European or Japanese equities as a buying opportunity. For his Japan exposure, Robert’s combines GLG Japan Core Alpha and Polar Capital Japan. In terms of Europe, he uses the likes of JPM Europe Select Equity and TT Europe ex UK.
A number of leading fund managers have grown increasingly cautious over recent weeks and many of them have upped their cash weightings as a result.
One of which is James Harries, manager of the top-performing £4.6bn Newton Global Income fund, who recently told FE Trustnet that he had parked money in the bank across a number of his portfolios due to valuations in equity markets as well as an “increasingly illiquid backdrop”.
“We believe the cash, which is held largely in short-dated bonds, will prove beneficial as volatility increases and as more attractively priced opportunities become apparent,” Harries said.
One of the major reasons why certain experts have become concerned, though, is because of the huge move in bond yields that has occurred over recent months.
The likes of Investment Quorum’s Peter Lowman and Margetts’ Toby Ricketts have warned that rising yields across European, UK and US government bonds is the start of a longer-term trend.
On top of that, given the high valuations on parts of the equity market which has created higher correlations to fixed income, they say that risk assets will be dragged down as well.
Performance of indices in 2015
Source: FE Analytics
However, despite his concerns over equities, Roberts is relatively constructive in his outlook for bond funds.
“Ten-year bund yields moving from 5 basis points to 75 basis in three weeks is a big move,” Roberts said.
“This has, in part, been caused by fundamentals such as inflation expectations and also the Greek situation seemingly improving. However, it has been a lot more technically driven. We have seen hedge funds and CTAs buying up bunds whatever the price and the ECB, via QE, has been doing the same.”
“When it turns and people who shouldn’t have been buying decide they want to sell, they all try and get out at the same time.”
He therefore doesn’t view this as a longlasting trend.
“People think the ECB will end QE early, but we don’t expect that to be the case so we don’t expect a big back up in yields. Also, while we think a US rate rise will happen this year, the pace of further rate rises will be glacial.”
“Therefore, I don’t think this is the start of a burst in the bond world.”
For his fixed income allocation, Roberts uses the likes of Fidelity Moneybuilder Income, which is headed-up by FE Alpha Manager ‘hall of famer’ Ian Spreadbury, and Pimco UK Corporate Bond.
The manager says there are also opportunities in the high yield market and, following the recent volatility, and therefore holds funds such as Nordea European High Yield, NB High Yield Bond and BlackRock Global Funds High Yield Bond.
Roberts and Lanning launched their fund of funds range, which consists of JPM Fusion Growth, JPM Fusion Growth Plus, JPM Fusion Income, JPM Fusion Conservative and JPM Fusion Balanced, in March 2013.
Their best relative performer over that time has been the £8m Growth Plus fund, which currently resides in the top quartile of the IA Flexible Investment sector since inception with returns of 21.98 per cent.
Performance of fund versus sector since Mar 2013
Source: FE Analytics
The fund, which has an ongoing charges figure of 1.41 per cent, has 30 per cent in Europe, 19 per cent in the US, 17 per cent in the UK and 16 per cent in Japan. It also has 7 per cent in alternative assets, 7 per cent in cash and 2.5 per cent in bonds.
