| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Bold front |
Fund Strategy - Dec. 14, 2009 - by James Smith
The past year surprised many as markets rallied and the worst outcomes of the global financial crisis failed to materialise. Meanwhile, high-profile managers came and went and several absolute return funds were launched, writes James Smith.
A?fter the massive declines of 2008, this year saw much stronger-than-expected rallies across most asset classes since March.
Panic has quickly given way to euphoria, with money pouring into bonds, equities and even property this year. Equity markets regained pre-Lehmans levels in recent weeks, although events in Dubai dented this somewhat, and assets including bonds, oil and gold have all rallied hard.
Alan Brown, the group chief investment officer (CIO) at Schroders, says the financial system has not returned to business-as-usual but the worst outcomes from the crisis have been avoided.
“Extraordinary public policy measures [near zero interest rates, quantitative easing and massive fiscal programmes] have engendered a weak recovery with all but the UK among major economies coming out of recession,” he adds.
Few would have predicted a bumper period for the industry post-credit crunch and yet 2009 was already a record sales year with a quarter still to be counted.
According to the Investment Management Association (IMA) January to September saw higher net retail sales than the whole of 2000 - the previous best year - and October was the seventh consecutive £2 billion-plus month.
Bonds have been in the ascendancy although credit’s 10-month run as most popular sector came to an end in September. Money came out of sterling bond funds in October and equities sold better over the third quarter for the first time since 2007.
Fixed interest has enjoyed huge popularity this year, with investors taking advantage of equity-like performance. With managers highlighting lifetime-best opportunities at the start of 2009, the average investment grade credit portfolio is up 17% over 12 months while high-yield funds have risen 37%.
A recent drop-off in sales suggests investors realise this story may be coming to an end, with multi-managers including T Bailey cutting a 20% credit weighting to 5%.
Jason Britton, CIO at Bailey, says recent outflows could be the start of a stampede to the exit, drawing comparison with commercial property in 2008. “We could see similar liquidity issues with corporate bonds in 2010 as the investment case is no longer compelling,” he adds. “Arguably, companies have now sorted out their refinancing so money is chasing lower-grade bonds.”
Despite such mutterings, managers still point to pockets of value and expect a reversion to traditional bond returns.
Jim Leaviss, the head of retail fixed interest at M&G, says credit spreads had widened to Great Depression levels at the start of 2009, with BBB debt yielding 7.75% over gilts. Many bought in at these levels and have benefited from a powerful rally, with spreads now back to typical recession levels.
Leaviss says: “We still see some value in high yield but not as much as in investment grade on a risk return basis as the toxic waste end has rallied too hard. We still believe credit will outperform government bonds next year but selection will be much more important: everything has rallied and that will not continue.”
Another theme in the IMA sales data is the resurgence of property funds, with the sector enjoying its highest net sales since June 2007 in September and taking the top spot in October. Managers now highlight property’s yield attractions in the face of low base rates.
Ann Breen, head of property research at Standard Life Investments (SLI), says commercial yields reached cyclical peaks in the past six months after capital values declined over 40%.
“The third quarter marked a clear point of inflection for commercial values in select locations, with value emerging in some of the larger more liquid markets in Europe,” she adds. “In recent months, property capitalisation rates have seen some improvement for the first time since the onset of the bear market in June 2007. Even so, income yields in Britain, at close to 8%, remain at 12-year highs.”
Breen notes considerable capital targeting the British market, boosted by sterling depreciation and the transparency of declines. “The economic and monetary environments, plus a better balance of supply and demand, suggest investors should reconsider the position of commercial property within their portfolios,” she adds.
Around the various equity markets, they all look much healthier than at the start of March, when many stocks were priced for depression.
At that stage, the realisation that the financial world was not ending was enough to spark a rally and this has lasted much longer than expected.
Heading into next year however, there is growing fear this is just a long-lasting bounce from extremely depressed levels and could fall away, especially as macroeconomic problems remain.
Stockmarkets remain vulnerable to external shocks, as recent events in Dubai have shown.
Several high-profile equity managers have refused to take part in what they see as a liquidity-driven rally - known as the “dash for trash” as the most sold-down stocks came back hardest.
Bill Mott, who runs PSigma Income, says early signs of economic recovery are dependent on the unprecedented largesse of governments and central banks.
“Investors have responded aggressively to these government actions, fuelling robust asset price reflation,” he adds. “However, it is our view that the current momentum-driven rally has gone too far, too quickly.”
Mott sees the most likely scenario as a long period of anaemic growth during which the economy gradually rebalances, avoiding Armageddon but not rallying very strongly.
Elsewhere, America is another tough market to call: earlier in the year, many adhered to the first into recession, first out theory but diminishing forecasts emerged as the year progressed.
John Chatfeild-Roberts, the head of multi-manager at Jupiter, recently warned the country risks Japan-style deflation, with growing unemployment and consumers under pressure. He questions whether recent positive indicators are merely the result of stimulus and are presenting a false picture.
Among the few consistently successful American managers, James Findlay of Findlay Park says the speed at which American companies have cut costs has been compelling.
“Investors are able to look at trough earnings with some certainty and invest based on normalised or recovery earnings a couple of years out,” he adds. “Corporate balance sheets are in reasonable shape and companies generating significant excess cash.”
Like many managers, Findlay says this year’s rally was driven by the most out-of-favour companies and therefore there may be a decent correction at any time.
“We feel this rebound may have run its course to some extent and can feel the market moving back to higher-quality companies gaining market share,” he adds.
European specialist Barry Norris, a partner at Argonaut Capital, says this is a decidedly unpopular bull run, with investors reluctant to accept that the rally has any genuine foundations. Looking for general rules about exceptional years for markets, Norris says academic research has highlighted a winning combination of depressed prices and sudden credit easing and 2009 fits this formula.
“There has been a tendency to see the rally as solely a government-sponsored liquidity event to the exclusion of any economic recovery or absolute value in equity markets,” adds Norris. “But leading economic indicators - as opposed to lagging ones such as unemployment - are consistent with not only all major economies having already emerged from recession but with above-trend GDP growth by year-end.”
While bears may dismiss this as low-quality growth based on one-off inventory rebuild, Norris says the impact on the real economy cannot be dismissed. “If we think return on equity will get back to somewhere near its previous peak, then should we not also expect aggregate corporate earnings to exceed the previous cyclical high of 2007?” he asks.
“This would be more than 100% upside to corporate earnings from here. Making such arguments seems fanciful today, but not to contemplate how operational gearing might work if economic growth returns to normal levels would be more outrageous.”
As expected, Asia and emerging markets have led this year’s rally with countries such as Russia and Brazil the best performers. But this region remains divisive among investors, with even long-term advocates warning of a Chinese bubble.
Bryan Collings, managing partner at Hexam, says money has flowed in as investors look to developing countries to pull the world out of recession. Looking past the traditional decoupling and bubble arguments, Collings stresses the base investment case for emerging markets remains stronger than ever.
“Given the level of globalisation, it would have been naïve to expect any major market to remain unscathed after the biggest credit crunch in history,” he says. “Emerging markets - just like their developed counterparts - are not a homogenous block and certain countries were in a better position to withstand the downturn.”
This year, after an initial surge, Collings says August saw a necessary correction in emerging markets as fundamentals caught up with strong price rises.
He highlights a strong macro picture for the region, with a growing population, urbanisation, and much lower debt levels than western countries - and yet emerging markets still trade at a discount to developed.
“Recent forecasts predict real GDP growth of 5.5% this year compared with just 3% for the developed world and importantly, this gap is driven by domestic growth as well as exports,” he adds.
On the China question, Collings says stimulus measures appear to have been effective and there are signs the sources of growth are broadening. “Conflicting concerns about asset bubbles in stock and property markets and the impact of a slowdown in loan growth deterred investors in August but the 23% correction in the domestic market looks overdone,” he adds.
“The authorities continue to reiterate that, with inflation under control and while growth remains unstable and unbalanced, policy measures will remain accommodative.”
Meanwhile, even perennial laggard Japan enjoyed a substantial rise from March lows, although yen strength has weighed on exporters and pulled the market down - at current levels, it looks set to be among the few regions ending the year in negative territory.
On the political front, Japan saw significant change in 2009 - in August’s lower house elections, the Democratic Party of Japan (DPJ) roundly defeated the Liberal Democratic Party (LDP), winning 308 seats out of 480. This gives leader Yukio Hatoyama a genuine mandate for change, particularly as the LDP has been in power almost continuously for the past 50 years.
In short, the DPJ’s policies are designed to promote the spending power of the Japanese consumer, while the LDP’s tend to favour big business and the bureaucracy.
Paul Chesson, manager of Invesco Perpetual’s Japan fund, says the country recovered in the three months to the end of June, ending four consecutive quarters of negative growth and technically bringing it out of recession.
However, Consumer Prices Index (CPI) weakened further, leaving the core rate of CPI at a negative 2.4% in August, suggesting deflation is an ongoing concern.
Chesson says valuations remain too low based on the strong probability Japan is in the early stages of an economic recovery.
“This might prove slow or patchy but Japanese companies have cut costs to such an extent that only a modest recovery is needed to bring profits through again,” he adds.
Elsewhere, commodities represent a rare part of the market where investors are confident this year’s rally should continue. Energy, base and precious metal prices are all surging on the back of dollar weakness and inflation fears, in addition to the longer-term emerging market demand story.
BlackRock’s Evy Hambro - manager of the £1.9 billion Gold & General fund while Graham Birch is on sabbatical - expects investors to continue using gold as a haven asset.
“Investors are looking to gold as a potential hedge against inflation, particularly as a result of quantitative easing in many countries and potential US dollar weakness,” he adds.
Despite gold recently breaking the $1,200 barrier, it remains below its previous high point in real terms: the 1980 level of $850 per ounce, when adjusted for inflation, is over $2,000 per ounce today.
On the product front, many predicted a quiet 2009 but the rally has created fertile ground for launches. About 100 funds have come into the retail space although twice as many have closed or merged, with little appetite for uneconomic vehicles in tougher times.
Most of the activity has focused on absolute return, with several new vehicles over the year. Apart from the usual retail houses, hedge fund providers are also entering this space, offering strategies within the risk constraints of Ucits as they attempt to rebuild assets. BlackRock, Argonaut and Liontrust have launched European absolute return vehicles, while Gartmore added British and European funds to its range.
Groups including Cazenove, SVM, Odey and Man Group have also introduced products based on successful hedge funds, with Gam the latest market entrant. The main difference between hedge funds and Ucits vehicles is the restriction on shorting in the latter, which means managers have to mirror such positions using contracts for difference (CFDs).
Mick Gilligan, the head of research at Killik, sees the increase in Ucits hedge funds as a welcome development, having encouraged groups to launch more absolute return offerings. “We have invested in BlackRock UK Absolute Alpha since day one and were keen for others with hedge fund track records to introduce similar products,” he adds.
Gilligan sees little difficulty in recreating hedge funds in a Ucits structure, with most long/short equity mandates using CFDs already and generous leverage allowed.
Other 2009 launches have been more focused or flexible portfolios for star managers, including William Littlewood, Richard Pease and Philip Gibbs.
Artemis introduced its Strategic Assets fund for Littlewood in May, the group’s first new vehicle in four years and the manager’s reintroduction to retail after a 10-year absence. The ex-Jupiter star has freedom to go long and short in equities, bonds, currencies and commodities and already has over £270m in assets six months after launch.
Henderson New Star launched a European Special Situations fund for Pease - another ex-Jupiter manager - in October, investing in 30-50 out of fashion companies. This was the debut product from the recently merged firm and it aims to give Pease more room to manouevre than on his near-£700m European Growth portfolio.
Finally, Jupiter itself has lined up two more funds for Philip Gibbs, whose stock is particularly high after successful defensive calls during the credit crunch. Absolute Return and International Financials, both of which were launched this week, will make Gibbs’ skills in long/short investing available to retail investors.
In another comeback, Fidelity announced an imminent China vehicle for Anthony Bolton, who stepped back from running money in 2007.
Darius McDermott, the managing director of Chelsea Financial Services, says Bolton is possibly Britain’s best growth manager and the fact he has gone for China is a major vote of confidence in the new economic superpower.
Elsewhere 2009 saw the first new split capital investment trust since 2005, Invesco Perpetual’s Dual Return fund headed up by Martin Walker.
Andrew Watkins, the sales director of specialist funds at the group, says: “Splits carry a stigma after the events of the late 1990s/early 2000s so we wanted to ensure this product goes back to the theme of income/capital separation. In the tax environment, with a 50% higher rate from next year, a vehicle that separates returns is particularly relevant.”
Manager moves were reasonably rare this year, with Guy de Blonay’s return to Jupiter from Henderson New Star among the most significant. He will run the group’s Financial Opportunities fund alongside Gibbs.
Perhaps the highest-profile moves came right at the start of 2009 when Jeremy Lang and William Pattisson resigned from Liontrust. Over the year, the group has hired a bond team from Ilex Asset Management and Ross Hollyman from Gam to run global equities as it broadens the range beyond Britain.
Gartmore was busy on the hiring front, boosting its European, bond and British desks. John Anderson joined from Rensburg as head of fixed income in July, followed by John Bennett and team from Gam on the European equity side. The latter is taking on the flagship European Selected Opportunities fund, freeing Roger Guy and Guillaume Rambourg to concentrate on alternative and institutional mandates.
Gartmore also recently brought in Leigh Himsworth from Royal London as head of UK equities, to revive the underperforming UK Focus and UK Growth portfolios.
?Themes for 2009/2010
?Darius McDermott, managing director of Chelsea Financial Services
“At the start of 2009, oversold bond markets were great value and funds produced equity-like performance this year. Economic conditions have fed this theme, with income-seeking clients forced to look outside cash as interest rates fell away.
While bonds were the story of the first half, stocks have rallied hard since March and recovered quicker than even the most bullish predicted. The question now is how far cyclical momentum can continue and whether the rally needs to broaden out to continue.
On the product front, absolute return is dominating and we like Ben Wallace’s Gartmore UK Absolute Return fund. Otherwise, 2009 was about comebacks, with William Littlewood launching a Strategic Assets fund for Artemis and Anthony Bolton’s just-announced China vehicle at Fidelity.”
Robin Stoakley, managing director of retail at Schroders
“By mid-March, the FTSE 100 had fallen to 3,600, many houses had let staff go and sentiment was awful. Compare that with eight months later: sentiment is much improved, the end of the recession is in sight and the FTSE north of 5,200.
Over the year, several groups have launched and promoted absolute return funds, which are deliberately managed not to participate in one of the strongest market recoveries for years. What a poor outcome for investors fully exposed during the market fall and then persuaded to switch to absolute return funds earlier this year - and what fantastic fees for managers running them.
These funds are either going to continue to suck investors in with promises of stable positive returns (an amazing 6.28% from the average absolute return vehicle over 12 months to November 5, compared with 33.65% from the average UK All Companies vehicle) or may well be exposed as the latest variant of the emperor’s new clothes.”
Simon Ward, chief economist at Henderson New Star
“The major surprise this year was the strength of recovery - obscured slightly in Britain as our economy has not performed so well.
World industrial production fell 14% peak to trough and has recovered 7% this year, so we have already made up half the ground lost in the recession. Those figures point to a V-shaped recovery much more than anyone expected.
Another key theme is the role of emerging markets, where output fell less and has rebounded quicker than in the developed nations.
Of course, the other major development in 2009 was the huge amount of liquidity pumped into markets, with the Federal Reserve and Bank of England continuing to inject cash despite recent improvements.
For the recovery to be sustainable, an improvement in labour markets is needed, as we cannot rely on consumers to support the economy. I believe such an improvement should happen, with many companies proving successful in strengthening their finances and generating profits ahead of capital spending.
When companies produce a cashflow surplus, we would expect to see investment spending followed by recruitment and that needs to come through.
Inflation remains a significant concern and headline rates will increase in the next six months owing to rising commodity prices.”
This could mean CPI inflation of 3% and RPI of 4% and while the Bank has said it will look through this, there could be a shock if people expect long-term loose monetary policy.
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