Defensive Positioning Boosts Multi-asset Managers Amid Volatile December Markets

Dean Cheeseman of Janus Henderson Investors

Dean Cheeseman of Janus Henderson Investors

Multi-asset managers who bolstered their defensive positions ahead of the market falls in December have trimmed these holdings and "cautiously" reinvested profits in more cyclical areas of the market such as emerging markets and high-yield debt.

Defensive positioning proved fruitful towards the end of Q4 as markets became increasingly volatile, with the VIX index leaping from 16.04 on 3 December to 35.50 just three weeks later.

Indeed, the FTSE All-Share, TOPIX and MSCI World were down by 3.8%, 7.1% and 7.4% respectively over December, heightened by a significant hit to global markets on Christmas Eve, and the

S&P 500 dropped 9.2% last month - the worst December for the US market since the Great Depression.

Commentators attributed the turbulence to investors' growing concerns over a slowdown in the US - and by association the world economy - alongside increasing geopolitical risk.

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Threats of a trade war between the US and China intensified towards the year-end following tariff increases on both sides, although a temporary truce was made at December's G20 summit, while Brexit remains a source of great uncertainty as 29 March looms closer without clear details of a deal.

Janus Henderson Investors' manager Dean Cheeseman said the group's UK-based multi-asset team increased sovereign debt, topped up commodities holdings and trimmed more richly valued cyclical equities ahead of December, mitigating losses in the firm's multi-asset range.

The £58m Multi Manager Global Select and £350m Multi Manager Managed funds lost 6% and 3.9% respectively in December, compared to their relative IA sector average losses of 6.7% and 4%, according to FE.

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Cheeseman said the team decided to take profits in their sovereign debt holdings in the latter stages of Q4 and used the market fall as an opportunity to top up on emerging market equities as "the trade war narrative took a more benign turn".

He said: "China moved to stimulate their slowing economy and the dovish tone from the Federal Reserve softened the US dollar, which is constructive for emerging markets."

Meanwhile, Bill McQuaker who co-manages Fidelity's multi-asset funds, said he had been hedging the technology sector in the US for most of Q4 but became more sanguine on the outlook towards the end of December, leading him to remove the hedges.

"I recently unwound my technology hedges in order to take profits but also allocate to more attractive areas, such as emerging markets," he said.

"While I am not bullish on tech, I do not believe another sharp sell-off is imminent. That said, a further recovery in prices would give ground for re-visiting the case for hedging."

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However, BMO GAM's Anthony Willis, investment manager on the multi-manager range, said the team took advantage of the market downturn to add to existing holdings, including the Artemis US Extended Alpha fund, which he felt was oversold, as well as taking short-term profits on some tech options held within the Multi-Manager Navigator funds.

He explained: "During the downturn, Apple's shares fell by 8% so we let go of an option as volatility spiked. We tripled our money on that."

FTSE All-Share and S&P 500 performance over 2018 (%)

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