Managers Brace for ‘Summer of Shocks’

Asset managers are raising cash levels in their portfolios and employing defensive trades ahead of a predicted “summer of shocks,” according to a survey by Bank of America Merrill Lynch (BoAML).

“Investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China, and quantitative failure.”The global survey, carried out earlier this month, reported that investors had made major reductions to their UK exposures ahead of a public vote on the country’s membership of the European Union on June 23.

The average allocation to the UK has hit a low point not seen since 2008, BoAML said, as ‘Brexit’ was cited as the biggest tail risk by the 168 respondents. This is despite 71% of respondents saying they thought “unlikely” or “not at all likely” that the UK would vote to leave the EU.

“Although global growth expectations rose slightly from the previous month, investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China, and quantitative failure,” said Michael Hartnett, chief investment strategist at BoAML.

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BoAML survey May 2016 The average cash balance from the managers surveyed reached 5.5%, BoAML reported. Similar stockpiles were last reported in 2012 at the height of the Greek debt crisis.

Managers also cited fears of devaluations or defaults in China as a serious tail risk to their portfolios, following a slump in Chinese economic output in 2015 and into the first quarter of 2016. Respondents predicted two interest rate hikes from the US Federal Reserve this year, and no move towards a “helicopter money” stimulus package—both seen as negative developments for equities.

These concerns drove investors into “defensive” sectors, the survey reported, including utilities and real estate companies. The majority of managers expected high-quality, high-dividend, and low-volatility stocks and strategies to outperform over the next 12 months. However, this area of the market was also cited as being the most crowded trade.

BoAML’s “risk and liquidity” index—a measure of how many respondents were taking more risk than usual—fell since April. A reading of 34, down from 36, was one of the lowest points since 2012.

The San Diego County Employees Retirement Association (SDCERA) has hired an assistant CIO from the city’s pension fund, furthering the buildout of an internal team.

Thomas Williams joins a senior staff that’s entirely new from a year prior, when SDCERA terminated its outsourced-CIO Salient Partners.

Williams has a 12-year track record in public funds. He led fixed income for Arizona’s state system (2004 to 2007), and has served since then as a portfolio manager for the San Diego City Treasurer’s $2 billion pooled fund.

SDCERA conducted “a comprehensive, nationwide search” to fill the assistant CIO position, according to its Wednesday announcement.

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Over the last 12 months, the $10 billion fund hired in-house CIO Stephen Sexauer, its former consultant David Wescoe as CEO, and replaced its chief legal officer and CFO.

This team marks SDCERA’s return to a traditional public fund investment and governance structure, following a fraught six-year foray into outsourcing and risk parity.

“It’s been difficult for the organization over the last six months,” then-Trustee David Moore said in January 2015, during a contentious board debate on strategy. “No event has occurred over this period of time with the [risk parity] program that has forced us to change our mind. And yet, for whatever reason, we’re changing directions because we got spooked.”

Board Chair Skip Murphy, in contrast, later characterized this direction change as a “philosophical shift to return to an in-house investment management program.”

Assistant CIO Williams begins work on May 27.