Across all the IMA sectors, according to data from Morningstar, from the 31 December 2010 to 9 December 2011, the 10 best performing funds were as follows:
1. Legg Mason Japan Equity – 23.2%
2. Baillie Gifford Active Long Gilt Plus – 21.74%
3. Henderson Long Dated-Gilt – 20.49%
4. Fidelity Institutional Long Bond – 20.35%
5. Baring Asset Management UK Long Dated Gilt – 20.19%
6. Newton Long Gilt Institutional – 20.04%
7. AXA Sterling Long Gilt – 19.82%
8. UBS Long-Dated Fixed Interest UK Plus fund – 19.56%
9. Schroder Institutional Long Dated Sterling Bond fund – 19.13%
10. Baillie Gifford Active Index-Linked Gilt fund – 17.6%
So much for the negative real returns from UK government debt we were all warned about!
How have these gilt funds managed to outperform, and is this something we should expect to happen again next year?
Gary Potter, co-head of multi-manager funds at Thames River, doesn’t think so: "Gilts have been the recipient of anti-equity money and of the scare factor in markets, which is understandable given what is happening in Europe.
"Interest rates around the world (apart from emerging markets) are pretty much anchored at very, very low levels. This has given people more confidence to invest in the long end of the gilt market.
"If the gilt market does the same again next year, with the Baillie Gifford Active Long Gilt Plus Fund posting returns of over 21% I think we have all got some problems, we will have an economic depression on our hands."
Gilts supported by risk off
The much-documented risk-off sentiment during the past year is to thank for the strong performance of gilt funds, as investors have flocked to them as an apparent safe haven.
This status has been reinforced by the belief that Cameron’s austerity Britain is good for the long-term debt profile of the country.
But conversely, the coalition’s decision to cut spending and cut it fast could lead to a poorer debt profile for the UK, as the government could struggle to reduce the nation’s deficit against the backdrop of an anaemic growth outlook.
"I think 2011 will prove to be an extremely rare good year for gilts," Potter said, "If we were to get any sort of resolution in Europe that investors were convinced by and higher risk assets became more attractive again, gilts would have a much more challenging year next year."
In this vein he sees a possible "rotation" out of gilt funds next year.
"I do not think their performance is only because people do not want anything else but that’s a heck of a part of it. Everything else has done so poorly and money has poured into gilts and pushed the prices up."
Next year is unlikely to be a repeat success for gilts then, on the basis that ‘things can only get better’ in the eurozone and risk appetite will therefore return to the fore.
In much the same way James sang the phrase in the 1997 Labour election campaign without any resultant follow-up to the promise, however, Potter admits he had hoped six months ago would have seen matters improve in the eurozone.
So gilts might prove to be more resilient than we think, even if fundamentals are overwhelmingly against them.
