Legal & General Investment Management's (LGIM) Justin Onuekwusi has been taking risk off across the Multi-Index range of funds, citing the uncertainty created by the US-China trade war, with the probability of the team’s base case "the lowest it has ever been".
Onuekwusi previously told Investment Week in April he had become more bullish on risk assets.
But the multi-asset manager said since then, things had changed: "The trade spat between China and the US means the extremes of both the upside and downside have just become a lot greater.
"Our base case is the lowest it has ever been in terms of probability since the inception of the Multi-Index funds in 2013. Therefore, we felt having a positive risk position no longer made sense. So more recently, we have moved away from buying on dips, to selling on strengths."
Onuekwusi explained when there is uncertainty, it is important to return to the funds' "first principle", which is diversification.
"So by spreading our risk over different asset classes, we think we are able to really smooth out some of the volatility we expect to continue to see," he said.
Onuekwusi pointed to the asset classes favoured by the multi-asset team given the 'lower-for-longer' environment, including infrastructure, REITs and emerging market debt.
He said: "They tend to give you a decent amount of risk relative to the equity market, so slightly lower than the equity market. But if equity markets are volatile, these asset classes tend to be less volatile."
He also warned of the concentration risk as an index investor: "Diversification is not just about spreading your risk across different asset classes. It is also within asset classes trying to diversify there as well. As markets continue to get closer to all-time highs in the US, you have seen this concentration risk go up.
"If you are an index fund manager, the stock concentration of your US equity portfolio is quite significant."
Within equities, the multi-asset team has spread risk in the risk-rated range over different regions, markets and sectors to reduce the potential for concentration.
Onuekwusi confirmed cash had gone up slightly across the fund range, with the LGIM Multi-Index 5 fund positioned with 4.5% in cash and the Multi-Index 4 fund with 5.6% in cash, according to the July factsheets.
He has also been increasing the duration in the fixed income portion of the portfolios.
The L&G Multi-Index 4 fund delivered a 7.4% return over the year to 25 September, compared to the UK RTMA Risk 2 Cautious sector average of 4.9%, FE data shows.
The L&G Multi-Index 5 fund also outperformed its sector over the past 12 months, generating a 6.8% return to 25 September, versus the UK RTMA Risk 4 Balanced sector average of 4.1%.