Despite signs of recovery in the West, caution still prevails, but it’s been large cap equities – and to an extent alternatives – which have excited investors the most in recent times.
A look at the latest IMA stats shows retail equity funds sales topping £1bn in August, with the UK Equity Income and Europe Ex UK sectors in the top five best sellers for the month.
But, are investors really so bullish on risk assets, or they looking for something else? The term ‘bond proxy’ has been doing the rounds for some time, but it still makes sense now particularly given the ongoing demand for yield.
“In a world where quantitative easing has been undertaken by most of the governments around the world in some form or another, bond yields have been suppressed and those investors looking for some level of income have transferred their assets into other areas that they wouldn’t naturally move towards,” says Marcus Brookes, head of Cazenove Capital Multi-Manager Diversity range.
“They were in cash, then they went to gilts, then when yields got too low, it was investment grade, and then high yield and now where? That’s when people are forced to go into things like property and other bond proxies, such as the Nestle, Unilever, Procter & Gamble and Johnson & Johnson’s of this world.”
Hot property
For Brookes, investors are not necessarily looking for the best equities with a view on future earnings and the opportunities and challenges ahead, but they are buying them because of their bond-like characteristics. The same goes for the move into property, a high-yielding relatively stable asset class which also features in the best-selling categories in the latest IMA funds data.
So what’s the alternative? For Brookes it is funds with a strong exposure to cyclicals, and also commodities – the antithesis of bond proxy – where, in his Global Fund, he has sold out of a 3% holding in Aberdeen Emerging Markets in favour of a position in JPM Natural Resources.
Of course, if yield really is a necessity maybe investors should swap their bond proxies for, well, bonds. While credit spreads have no doubt compressed, Ben Bennett, credit strategist at Legal & General Investment Management still asserts that bonds have an important role to play in portfolios.
He explains that despite a multi-year bull market rally, bonds in general and corporate bonds in particular remain a relatively attractive asset class under both a scenario of gradually improving economic growth or even an unexpected relapse, whereby active corporate managers will take more opportunities to choose between potential winners and losers.
“The downside scenario for bonds is if growth aggressively accelerates and central bankers find themselves in catch-up mode, but this seems to be the least likely outcome,” he says.
“With yields close to their all-time lows, corporate bond returns are unlikely to be very high, but given continuing economic fragility, reports of the asset classes’ demise may have been greatly exaggerated.”
