| 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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| More |
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| Income Equities: |
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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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The three wise investments? |
Wealth Bulletin - Dec. 14, 2009 - by Phil Craig
The risk and reward profiles of equities, fixed income and property have been a source of argument for generations among advisers and investors. But, looking back over the past decade, fund managers agree that low interest rates contributed to a bubble across all three asset classes. FN asked specialists in each of the asset classes what drove performance.
For the past decade, the return profile for each asset class differed year on year, contributing to the belief that active asset allocation should be adopted by investors, according to Simona Paravani, global investment strategist at HSBC Global Asset Management.
She said: “The best and worst asset classes changed in each calendar year. We need to remember asset classes are not perfectly correlated, and perform differently under different conditions.”
• Equities The decade opened with a bang – the tech bubble burst in March 2000 after valuations in global equities markets more than doubled in the late nineties, thanks largely to investors’ enthusiasm for flaky technology stocks. But soon after equities started to fall, economic concerns added to investors’ pessimism, leading to a multi-year bear market. The markets bottomed in October 2002.
A sustained recovery began in March 2003, the same month as the start of the second Gulf war. Analysts called an end to the bear market within months, citing forecasts that suggested companies would grow earnings fast enough to back up their valuations. Investors who placed money to track the MSCI World index on September 10, 2002, would have more than doubled their money over the following five years. By the time the index peaked on October 31, 2007, it was up 139% in dollar terms, by far the most profitable period in the decade for equities investors.
However, some believe that focusing purely on equities returns is misleading. Stephen Docherty, head of global equities at Aberdeen Asset Management, said one of the main drivers behind the bull market from 2003 to 2007 was not earnings growth, but governments’ policy response to the bear market. Interest rates were slashed around the world – the US Federal Funds target rate fell from 6.5% to 1% while markets fell, and the UK reduced rates from 6% to 3.5%.
Price/earnings ratios over the period also suggest that investors were less enthusiastic about equities than returns suggest. The ratios, as measured against the MSCI World index over the decade, peaked early in 2002 with share prices at more than 30 times earnings. They fell to 18 times earnings within two years and continued to decline through the bull market, dipping to 16 times earnings when the market peaked in late 2007.
A falling ratio suggests that prices were not rising as fast as earnings. Marino Valensise, chief investment officer at Baring Asset Management, said: “Equities were de-rated during a bull market. Maybe people were sceptical of earnings, or whether inflation could remain under control for much longer.”
Then the credit crunch in mid-2007 heralded a new bear market. A year later, the collapse of Lehman Brothers and the ensuing financial crisis pulled markets down even further. From its peak in 2007 to its trough in March this year, the MSCI World index fell 59%. That compared with a 54% peak-to-trough decline in global equities valuations in real terms after the Wall Street crash of 1929, according to Paul Marsh, emeritus professor of finance at the London Business School. Markets have since bounced back, but are still substantially below their peak.
• Fixed income
Bond investors did better than equities investors over the past 10 years, according to Simon Pilcher, head of fixed income at M&G Investments – a state of affairs that would have been deemed highly unlikely at the start of the century.
He said: “It’s not just that equities investors have faced more write-offs, but the price of the average stock has advanced less than the coupon of investing in bonds.”
However, in absolute terms, fixed-income investors have faced a difficult time along with their peers in the equities markets. At least one of the explanations for booming returns, before substantial losses last year, runs in parallel with equities – low interest rates following the tech crash.
Theodora Zemek, global head of fixed income at Axa Investment Managers, said: “You had such a long period of very low interest rates, it was a no-brainer to stick money into anything with a mild amount of risk. People were willing to take on credit and financial risk, and then equity risk. You weren’t being rewarded for holding government bonds.”
However, two other significant changes emerged over the decade for fixed-income investors. First, since the introduction of the euro as an accounting unit in 1999 – coins and notes were distributed in 2002 – the market for European credit boomed.
Pilcher said that at the turn of the decade there were “very few” European investors with history of investing in credit: “It is quite easy to forget that most European investors are relative novices. Mid-decade, it was a very benevolent environment. People became complacent, buying off rating agencies’ ratings, which led to the explosion in structured credit. People forgot the ultimate purpose of fixed-income – you want it to produce cash flows that meet liabilities.”
Zemek believes fund managers and consultants are to blame for investors’ failure to acknowledge the importance of capital structures, the second defining factor of the decade. She said: “Capital structure is the history of the 21st century.”
After the tech crash, bond investors received more capital than equities investors, who were lower on the ladder for returns. But as the bull market developed, investors remained ignorant of the complexities of capital structures.
Zemek said: “Nobody wanted to differentiate between senior debt and tier one debt. Suddenly people realised there was a huge gap between them.” She blamed fixed-income indices. The more a company borrows, the greater part it plays in what Zemek called a “reprobates index”.
The economic downturn is going to make it hard for the bond markets to recover, Zemek believes. She said: “My experience of recessions is that they go on for a hell of a long time. The long-term effects are incredibly nasty and painful.”
• Property
Property investors, along with their counterparts in the equities and fixed-income markets, said that a ready supply of debt led to the huge rise and fall of the sector since the turn of the century. Anne Breen, head of property research at Standard Life Investments, said: “The last ten years, especially the five years to 2007, were about readily available and cheap debt for the property sector.”
In the UK, bank lending to property investors jumped from £50bn to £250bn during the period, and commercial property as a proportion of banks’ total lending increased from 8% to 12%, according to Breen, who said such growth was reflected across the global real estate markets. The rise in property values over the years up to 2007 differed from the last real-estate boom in the early nineties, which was driven by a 50% rise in rental values over three years. During the latest boom, rents rose only 9%, suggesting that valuations rose due to investment rather than a jump in demand from occupiers.
David Skinner, research director at Aviva Investors, said that the property market became much more integrated in global financial markets, which explained why property values rose along with other asset classes, and fell with them in the wake of the financial crisis. He said: “Structures and instruments like real estate investment trusts, commercial mortgage-backed securities and property derivatives emerged in different regions over the last decade, leading to much more visibility in property markets. That meant they were much more tied in with other asset classes, which helped valuers and other investors.”
But he added that increased gearing, integration into markets, and the growth of retail investment in the asset class – exemplified by UK investors’ enthusiasm for the sector – meant that the performance of real estate as a whole had become more volatile, and would continue to be so in the future.
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| Stuff to look at |
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S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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