After an extended risk-on/risk-off period in the markets, many commentators are saying there has been a reduction in tailwinds thanks to improving macro data from the US and positive action by the European Central Bank (ECB).
Equity investors have also been more bullish in recent times, with all the major global stock market indices producing double-digit returns over the past six months.
Performance of indices over 6 months
Source: FE Analytics
However, some fund managers now feel that the surge in equity markets has gone too far.
Rathbones' Julian Chillingworth and Henderson’s James de Bunsen are two such managers.
Julian Chillingworth
Julian Chillingworth, manager of the five crown-rated Rathbone Blue Chip Income & Growth fund, says that because defensive stocks have led the recent rally, he has slashed a number of positions within the portfolio.
"We have reduced our weighting to the likes of Diageo and BT and we have also taken out slender positions in Unilever and AB Foods," he said. "We have taken that money and are now holding it in cash, so our cash weighting has been built up to around 6 per cent."
"The reason for this is because we have had a very good run in the stock market, but I am now concerned about data coming from the US wage-reporting season and I now think that the various quantitative easing packages from the world’s central banks are being priced into the market."
"It is around this sort of time that we see some sort of pull-back in the market as investors take some profit, however I am not expecting a correction to be anything too serious."
"We have taken some money off the table and are holding it in cash because when we see a meaningful correction we will look to reinvest."
According to FE Analytics, Chillingworth’s five crown-rated Rathbone Blue Chip Income & Growth fund has performed well in the recent rally.
The £48.4m fund has returned 9.67 per cent over three months, 14.55 per cent over six months and 25.77 per cent over the last year.
It has beaten both the IMA UK Equity Income sector and the FTSE All Share index over all three of these periods.
The fund’s medium-term track record is also strong. It has posted returns of 38.75 per cent over three years, while its sector and benchmark have returned 31.92 per cent and 26.63 per cent, respectively.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Rathbone Blue Chip Income & Growth has also been considerably less volatile than the index and its peers over this time.
The fund requires a minimum investment of £1,000 and has an ongoing charges fee (OCF) of 1.61 per cent.
It has a yield of 3.79 per cent.
James de Bunsen
James de Bunsen, who runs the Henderson Multi Manager Absolute Return fund, says that although he is not bearish on the outlook for markets, he believes a correction is due soon.
As a result, he has dramatically increased his cash weighting in order to take advantage of cheaper valuations when the market takes a turn for the worse.
"The Henderson Multi Manager Absolute Return fund has gone from 3 per cent cash at the start of the year to 16 per cent in recent weeks as we became concerned about the steepness of the rally," he said.
"The main reduction in risk came from high yield exposure as we thought the risk/return had become more asymmetric, with the average bond in the space trading well above par at 106."
"We also took some profits on some of the equity exposure, which in one case had rallied over 30 per cent since the latter part of 2011."
"We’re not bearish by any means but felt that we now need some positive growth surprises to sustain what has been a meaningful rally," he added.
"We are fairly positive on the US, which has shown some real signs of a sustainable economic upturn, driven by a housing turnaround, rebounding auto sales, improving employment numbers, positive consumer sentiment, credit creation and so on."
"However, the political impasse that led to sequestration, combined with tax increases and ongoing fiscal restraint, is likely to lead to a softening in US data releases during the second quarter."
"This may lead to what has become an annual rite of passage whereby New Year optimism gives way to a late-spring bout of self-doubt, either prompted by weaker data or another European misadventure."
"We don’t see anything positive emanating from Europe in the near-term and in fact it remains the biggest risk in terms of triggering a more meaningful correction."
"Nevertheless, we believe that the rally has been driven primarily by belief in a genuine US recovery, coupled with a reduction in the European crisis risk premium, so if we were to see some market consolidation we’d be inclined to take the cash weighting down and add some more risk in anticipation of a healthy second half of the year in the US."
The £165.5m Henderson Multi Manager Absolute Return fund was launched in October 2008 and over that time it has returned 26.16 per cent while the IMA Absolute Return fund has made 21.25 per cent.
Performance of fund vs sector since Oct 2008
Source: FE Analytics
The fund has also beaten the sector over three and six months and one and three years, and in every calendar year since its launch.
The fund holds 26.9 per cent in fixed income, including Richard Woolnough’s M&G Optimal Income fund and Melanie Mitchell’s Kames High Yield Bond fund.
In terms of the fund’s equity exposure, de Bunsen holds M&G Global Dividend, First State Global Listed Infrastructure and FE Alpha Manager Luke Kerr’s Old Mutual UK Dynamic Equity fund within his portfolio.
Henderson Multi Manager Absolute Return has an OCF of 2.23 per cent and requires a minimum investment of £1,000.