Market volatility might be scary for investors, but it could craft the ideal environment to make the most of unexpected opportunities, according to Adam Kibble, fund manager – multi-asset at Schroders.
In the firm’s $2.8 billion flagship multi-asset fund, Schroder Real Return, Kibble said he had opted to be overweight cash and was holding the lowest weighting to equities since the fund’s inception in 2008.
Cash was the fund’s top holding at around 22% as at the end of February, while equities were down to 15%.
Kibble, who ran the fund alongside chief investment officer Simon Doyle, noted there was the possibility of equities reducing even further, as the fund’s mandate allowed for an equity range of 0% to 75%.
“There are parts of the market we like, and the bits that aren’t priced for recession, we don’t like. The idea this year is to keep things liquid, to have a lot of cash, so that when things do weaken, we’re in the position to make a decision quickly,” he said.
Kibble noted volatility translated to prices changing rapidly due to confusion or uncertainty about the future, but it could also prime the firm with a competitive advantage in buying assets.
“It’s difficult when bonds and equities fall; it’s hard to not lose some capital, but we’re well-known for having good downside protections in the portfolio. It’s aggressively varying that asset allocation that helps us do that and we’re probably in the most risk-averse position at the moment,” he told Money Management.
Among some of Schroders’ key risk points of the year were watching for signs of recession and whether central banks were likely to “win the fight on inflation”, he stated.
“The good thing about volatility is it creates opportunity, and for us, that’s buying assets. We tend to be contrarian, buying when people are selling […] and by being liquid, we’re able to buy cheap assets that set you up for the next three years in terms of returns.”
Despite recent banking crises such as Credit Suisse and SVB that had shaken investors, 2023 continued to mark an “exciting time” for the new fund manager, who commenced the role in early March.
“We think there won’t be flow-on effects in terms of bank liquidity, but the bigger problem is those banks will now reduce lending to businesses and consumers. We’re already seeing lending standards being increased,” Kibble said.
As Schroders continued to watch how this could affect the tail risk of further interest rate hikes, he believed the outlook for government bonds was beginning to shape positively.
“Watching lending standards and how credit tightens is the next phase of what we’re doing; that will determine how long or deep a recession is,” he stated.
