Wealth managers have been raising exposure to cash, defensively-positioned equity vehicles and absolute return funds in anticipation of more downward pressure on markets, after a tumultuous third quarter.
Ongoing uncertainty surrounding the timing of US interest rate hikes, concerns about a China slowdown, the Volkswagen emissions scandal and woes at commodities giant Glencore have continued to weigh on markets since the ‘Black Monday' sell-off in late August.
Global markets have shed an estimated £7trn in value over the past three months, with the MSCI All Country World index down 11.5% over the quarter and the FTSE 100 down 7%.
"There will absolutely be more volatility," said Oliver Wallin, investment director on the Octopus multi-manager team.
"We want answers on the China slowdown and US interest rates. The recent Fed announcement created a lot of uncertainty and it could have been managed better. There is not a lot out there which is supportive of a positive view."
He said the team has been holding a higher than average cash weighting of 5% to 6% and has selected market neutral strategies as defence mechanisms for portfolios.
Fund manager reaction: Where now for rates after Fed hold?
Guy Foster, head of research at Brewin Dolphin, and Richard Philbin, CIO at Harwood Multi Manager, have also reduced some equity positions and added to absolute return mandates, with the latter naming the Old Mutual Global Equity Absolute Return fund, SLI GARS and Henderson UK Absolute Return among the firm's top picks in the sector.
Foster said: "We do expect further volatility as people are uncertain about monetary policy, we have disparate growth performance across the world and we do not think these will abate any time soon. We have reduced risk by cutting our overall equity weighting and etching up absolute return fund exposure."
However, further volatility could throw up opportunities to deploy some cash in areas already earmarked for potential investment.
Paul Derrien, investment director at Canaccord Genuity Wealth Management, said he will be putting "money back to work in portfolios", after reducing his equity weighting earlier this year.
"The quarter is all about the equity markets and being comfortable in our levels of risk. We will be buying back into Europe, as markets are back to their lows which is a good time to purchase, but we are hedged as QE is still going on, and there is the chance of the euro weakening," he said.
"Equity markets could go lower, but will rise at some point. We would like to get our equity position up to full risk across all portfolios."
Meanwhile, the issue of whether now is the time to increase emerging market weightings has polarised opinion amongst fund buyers.
Darius McDermott, managing director of Chelsea Financial Services, said the group is among those eyeing opportunities in this area in the fourth quarter.
"We are looking at whether or not to dip our toe back into emerging markets, particularly Latin America, with a focus on high risk positions in Brazil. At the moment, we are just watching and waiting to pull the trigger."
