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Top fund manager nervous as market hits new 5 year high

Highly regarded fund manager Mr Anton Tagliaferro, who is the founder and Investment Director at Investors Mutual – a company part owned by the listed Treasury Group (ASX: TRG) – has told Investor Daily that he expects a market correction to occur, as investors wake up to the fact that earnings growth is lagging well behind stock market gains.

One sure sign that the stock market is ‘red hot’, is the fact that Mr Tagliaferro has 15 prospectuses for company Initial Public Offerings (IPO) sitting on his desk. The market beating fund manager, suggests the majority of these prospectuses are “destined for the bin”. He warns investors that “everyone’s forgotten about the last pile of junk that was listed, and everyone thinks there are private equity people bearing gifts.”

Certainly some of the recent IPOs have been providing quick profits to investors. The OzForex (ASX: OFX) float opened around 30% above its subscription price of $2 last week; while the Virtus Health (ASX: VRT) share price hasn’t looked back since its listing in June. Virtus’ shares are up 56% on the offer price, compared with a 13% rise in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the same period. On the other hand, iSelect’s (ASX: ISU) poor debut stands out as a warning to investors, that they should not blindly expect profits simply by jumping on board the latest IPO.

Foolish takeaway

Mr Tagliaferro’s answer to his nervousness regarding high valuations and the lack of investment opportunities he can identify at current prices, is to increase his holdings of cash. He’s not alone either with a number of other high profile fund managers also holding significant cash reserves, some as high as 50% within their portfolios. Whether holding cash, or remaining fully invested is your chosen strategy, readjusting your portfolio into ‘cheaper’ stocks and away from any stocks which have increased well above your estimate of intrinsic value, is one way to protect your portfolio from a significant market correction.

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Motley Fool contributor Tim McArthur owns shares in Treasury Group.

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