Russell Investments Bought Stock Protection Before S&P 500 Slide

Apr 16, 2014 9:30 am ET

April 16 (Bloomberg) -- Russell Investments, the U.S. asset manager that oversees $257 billion, bought protection against a drop in equities shortly before last week’s selloff.

The firm acquired puts on the Standard & Poor’s 500 Index before last week’s 2.7 percent slide, Alain Zeitouni, head of multi-management at Russell Investments France said. Russell bought the contracts on April 4, giving the asset manager an underweight position on U.S. stocks even though it didn’t sell shares. The company bought more European equities last week and favors Japanese stocks, which have plunged 10 percent this year.

“Protection is cheap and we’re a bit cautious,” Zeitouni said in Paris on April 10. “We don’t see a big rally in equities in the U.S. We’ve been expecting a correction.”

Investors are questioning U.S. equity valuations after the S&P 500 reached a record on April 2. The benchmark has since retreated 2.5 percent. Last week it posted its worst week since 2012. The Chicago Board Options Exchange Volatility Index, which measures expected volatility using options prices, surged 22 percent to 17.03 last week.

Russell upgraded its stance on European equities to neutral from underweight during last week’s slide in stock prices. The company changed its position because of better economic data, he added. It won’t take a positive stance on euro-area shares until the European Central Bank does more to sustain financial markets, the fund manager said.

“As long as the official speech of the ECB hasn’t changed, we are not keen on building up further in portfolios of European equities,” he said. “One percent growth is not enough to create more jobs and to drive people to consume.”

European Economy

While indicators such as French manufacturing and German factory orders have improved, the economy of the 18 nations in the euro area will grow just 1.1 percent in 2014 and 1.5 percent in 2015, according to estimates compiled by Bloomberg. U.S. gross domestic product will expand at twice that pace both this year and next, according to the projections.

Japan is Russell’s preferred region among developed-market equities, Zeitouni said. The Tokyo Stock Price Index has plunged 10 percent this year on concern Prime Minister Shinzo Abe’s policies will fail to end the country’s deflation problem.

“The move from deflation to non-deflation is an interesting and a long story,” Zeitouni said. “The recovery is there and we see good signs on salary and consumption increases.”

The Topix jumped 51 percent in 2013, its best year since 1999, as the Bank of Japan embarked on a bond-buying program.