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Whether or not the stock market is headed for a correction is often a question best left to hindsight.
That said, one of the DFMs we cover has taken a number of measures to ‘bubble-wrap’ client portfolios should things go south from here.
James Crocker heads up Albert E Sharp's MPS arm and he’s been in touch with Asset Allocator to notify us of his concerns surrounding the state of equity markets at present.
“I still worry that the full effects of higher interest rates haven't been felt,” he said.
“At worst maybe the markets will run out of gas, and they will need a very good reason to justify why valuations can be extended further, particularly in the US.”
As a precaution he has taken a 7 per cent cash position, so as to be paid a little for waiting and seeing.
“I think the value of some dry powder could really come out at some point over the next few months. It's not done Warren Buffett any harm having big cash, or near-cash positions,” he said.
“That is why we're very happy to keep on doing that. And as the market goes up, people say to me, ‘well that's proof that you are wrong’. And therefore as the market has carried on going higher, it convinces me that the value of that cash only increases.”
What would compel him to break the piggy bank?
Small-caps, apparently.
“The case for small caps to rally going into a recovery, I think, is extremely persuasive and totally stands to reason,” he said.
What else?
Something that’s come up several times in our conversations with allocators is their concern around how much more room the magnificent seven have left to run.
Indeed Crocker said that even the adjective ‘magnificent’ is already a symptom of a frothy market.
As such, he told us Albert E Sharp is going properly active in the US for the first time to dilute some of that ‘clustered’ exposure.
While he acknowledged that active managers find it nigh-on impossible to beat the S&P 500 in the long-run, he is now seeking exposure to mandates that are by default structurally underweight big tech.
Another layer of bubble wrap, he added, is making sure they’ve got a short duration exposure in fixed income.
Short duration bonds would be expected to perform better should inflation rise from here, moving inversely to the tech stocks which he has been tapering down.
Crocker said too many strategic bond managers have been duration-neutral over the last few years, which has proved something of a lottery. Because of this, he said they’ve decided that they can make duration calls based in Stratford-upon-Avon, and not necessarily by outsourcing it to City bods.
One final layer of downside protection, according to him, is taking a significant wedge in long-short equity funds as part of Albert E Sharp’s alternatives exposure.
This of course gives managers the ability to bet against companies in the event of a falling market, and he is happy to invest in these particular strategies as they are far more simple to understand than anything market-neutral.
With this all in mind, Crocker insists he doesn’t want to be categorised as a bear who’s short on the market. He said that his clients pay him to make decisions, and if that decision is to raise cash, then it's "hardly a reckless one".
