The S&P 500 and the Dow Jones index recorded their worst December performance since 1931 and biggest monthly loss since February 2009, according to Ellerston Capital.

Shying from risk

Investors shied away from taking big risks as an continuing trade stand-off between the United States and China intensified, while firm details on Britain’s plans to leave the European Union remained elusive, IFM Investors’ head of large-cap equities, Lachlan Davis, noted.

The US Federal Reserve showed it was determined to continue to raise interest rates, casting doubts over the health of the US economy, he said.

Another factor that made the fourth quarter even more unusual for global investors was the speed of turnaround — from a market where many stocks were either hitting record or 52-week highs in September to bear conditions by the end of the year.

Cash levels were the swing factor for fund manager performance in 2018  Jenny Kane

Mr Davis observed a “pronounced change” in sentiment during the quarter and high rotation within the market.

“I think a lot of it was that people got more defensive,” he said. “There was a lot of rotation in the market and some of those previously strong performers that were market darlings got sold.”

October was particularly volatile but December was not much better, disappointing investors expecting a year-end rally.

“December was such an extreme month. It was the worst pre-Christmas period on record for the US market,” said AMP Capital’s head of investments, Shane Oliver. “If you had taken a cautious view on markets and loaded up on cash you would have been OK,” Dr Oliver said.

Cash holdings

Magellan chairman and Rich Lister Hamish Douglass revealed in July that he had lifted the cash weighting of the Magellan Global Fund to 18 per cent, the highest level since 2009.

A confluence of record asset prices, central banks moving to remove liquidity from the financial system and a large fiscal stimulus effort (in the form of US tax cuts) in a maturing economic cycle rang alarm bells for the global investor.

“Only conservative investors sleep well,” the manager said in July.

“Those who went to cash or bought some puts were protected,” said Platypus Asset Management portfolio manager Prasad Patkar, the co-manager of one of the country’s best-performing, long-only Australian equity funds in fiscal 2018.

In Mr Patkar’s view, the level of defensiveness in portfolios outweighed style in the latter part of the year in terms of performance.

Fund managers tend to fall into either the growth or value camp, with growth investors hunting out companies that can deliver strong earnings while value investors try to hunt down companies that have been oversold by the markets.

Both investment styles had their challenges in 2018, Mr Patkar noted, with many highly valued growth stocks falling from their peaks, and quite a few painful moments for value investors. CYBG’s share-price tumble was one such example.

Mr Patkar said although the growth-focused Platypus fund did not consciously move to a defensive stance over the quarter, cash levels increased naturally after it reduced some positions. The fund was down “a small amount” in the final quarter, he said.

“It was a pretty nasty year in hindsight,” he commented.

Looking ahead

For Mr Patkar, the key question as the year gets underway is how fund managers will deploy their cash, if they do. Overall, 2019 should be a better year for equity markets than 2018, he said.

There are signs that trade-war tensions could ease, and markets recently were cheered by soothing commentary on interest rates from the US Federal Reserve.

Even so, the investing environment is one for the stockpickers, Vertium Asset Management chief investment officer Jason Teh said.

“There was very little to buy (last year) but now the pool of opportunity has opened up,” he said. “We are just wading through a volatile minefield and trying to find good stocks.”

“I’m looking at all the cyclicals that got hit hard over the last quarter,” he said. “Price-to-earnings ratios have collapsed, especially over the last quarter.”

Romano Sala Tenna at Katana Asset Management, who held as much as 38 per cent cash last year, said he was trying to buy companies at depressed prices.

“Things are oversold. There was a lot of panic and negativity factored in to the market,” he said. “We’re not interested in defensives; we’re looking for companies that have some leverage.”

Performance will become clear at the end of the month when Mercer releases its survey of Australian fund managers.

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