Increasing correlations between assets classes have left "no place to hide" for multi-asset managers as concerns over a tapering of US QE hit home.
HSBC’s ‘risk on/risk off index’, which measures the correlations between 34 global asset classes, spiked sharply at the end of June as correlations increased across the board.
Fund sector research for H1 from Fitch Ratings also shows multi-asset funds have recently suffered as equity/bond correlations turn positive in falling markets for the first time in three years.
The agency warned multi-asset funds will have to increasingly resort to cash, short duration assets and derivative hedging as there is “no obvious place to hide”.
Mike Deverell, investment manager at Equilibrium Asset Management, said: “Some multi-asset funds are struggling because all the investments they have been using as hedges – equities, government bonds, gold – are going down at the same time.
“Some managers have been trying to focus on capital preservation and hedging against equity risks by investing in index-linked bonds or gold, but they have actually added to the risk.”
HSBC strategists said recent falls have significantly changed the profile of ‘risk on’ and ‘risk off’ assets, signalling the “death of safe havens” – temporarily at least.
“We have been very conservative and measured about this sell-off, but there is no place to hide at the moment,” agreed Mona Shah, co-manager of Rathbones’ multi-asset portfolios.
While renewed concerns over Portugal prompted a small rebound in core government bonds last week, recent market conditions have led some managers to up cash allocations in the absence of fresh opportunities.
David Jane, manager of the Darwin Multi-Asset fund, recently took his cash position as high as 20%, while Troy Trojan manager Sebastian Lyon had 14% of his portfolio in cash at the end of May.
Jane (pictured) said the recent sell-off has been “highly correlated” and “true diversifiers have been few and far between”.
Lyon said: “The fund’s liquidity has been rising as we have found fewer appealing investment opportunities. In a world where most asset prices have risen, thanks to loose monetary policy, it is becoming harder to diversify.”
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