Managers seek safe havens as chaos returns to markets

Chaos in markets across the globe this week following heavy sell-offs prompted some commentators to warn of a new credit crunch, and left investors desperately seeking safe assets.

Fund managers have adopted a range of tactics in a flight to safety, with some looking to gilts, cash, and gold and others holding their nerve to buy equities on weakness.

MAM Funds’ Martin Gray said the falls across the board were a “long overdue correction” caused by markets’ realisation the West is consumed by debt. “People have now woken up from their dreamland – things have been out of line for the last six to 12 months, and this is a dose of reality.

“What it tells us is that QE2 in the US did nothing for jobs or growth, and has only kept the banking system alive for a little longer.”

Gray has been adding to UK large-caps with a sustainable yield in his £640m CF Miton Special Situations fund, avoiding commodities and financials, and has sold off gilts at the margins.

“There are not many places you want to be – gilts, treasuries, Asian sovereign debt and bunds, and sterling cash, because the pound is stronger than it should be, but you would have to be brave to buy the dollar now,” he said.

Darwin’s David Jane has been sheltering in long duration bonds in his TM Darwin Multi Asset fund. “In a sense this is phase two of the credit crunch, which we have been expecting. We have had six months of things going horribly wrong, and markets were going higher.

“This is a solid, high volume spook, so we should not be too sanguine about it. We have built up positions in long duration bonds and taken our equities exposure down by 10% to batten down the hatches. We also have 6% in gold.”

Derek Mitchell, manager of the £463m Royal London UK Opportunities fund, added to oil stocks today as he sees a large disconnect between the shares and the underlying oil price.

“The shares are very much private client holdings and just going down as a result of forced selling,” he said, adding the market as a whole looks “outstandingly cheap.”

For other managers, the UK still looks safe, with Smith & Williamson’s Charlie Deptford arguing the market is safer than others affected by the European sovereign debt crisis.

“I think the UK is probably the best place to be putting money,” he said. “If Spanish yields move above 6.5%, Spain will need a massive bailout and then every bank in continental Europe will need recapitalising. The UK will not need to do that.

"We have not got a sovereign debt problem and the economy looks ok compared to the rest of the world – gilts are not going to default. Sterling might be a safe haven for worried investors.”

Threadneedle’s CIO Mark Burgess has also been buying into UK stocks today, pointing out many have a dividend yield higher than that of 10-year gilts.

“I do not know if this marks the low of the equity markets, but I do know valuations are low and companies are strong financially,” he said.

“In UK equities, the dividend yield on the market is now higher than on 10-year gilts, a valuation anomaly I have never seen before. Hence we are buying some UK equities this morning.”

Meanwhile, leading bond managers attributed this week’s market plunges in part to the European Central Bank’s move on Thursday to improve liquidity in markets, which they said was too little, too late.

Phil Milburn, manager of Aegon’s £442m High Yield Bond fund, said markets were aware long before policymakers that Italy will be the next eurozone economy to fail.

“The markets have realised the sovereign crisis has spread to Italy, the world’s third biggest bond market worth €1.7trn, and the eurozone authorities are so far behind the curve is it scary – the ECB has its fingers in its ears,” he said.

“On Thursday we saw the ECB squandering money buying up Irish and Portuguese bonds on the secondary market. What a bunch of jokers - they should have been buying Spain and Italy’s.”

Ignis’ head of credit Chris Bowie echoed this view, saying: “Until European politicians get their act together and wake up, we will keep seeing volatility.”

He added the safe haven for UK investors is still gilts, although in his own fund he is starting to add some risk assets, buying high quality corporates such as Sainsbury’s.

However, Barings’ fixed income head Alan Wilde said gilts are a “raging sell” because the UK could be dragged into the eurozone crisis. “If the government does not stick to the austerity measures, the UK could be looked upon in the same way as Greece, Italy and Ireland.

“We have been reducing exposure to gilts as international investors have been propping up the market and they are now starting to reduce exposure too.”

Aberdeen’s global head of fixed income Paul Griffiths added he favours gold and EM equities over gilts as a safe haven.

“There has been a flight into gilts and treasuries, as there is a perceived safety, but what you have got to remember is they are still set against a backdrop of big indebted countries, so we prefer gold and emerging markets in a volatile market,” he said.