At the start of 2014, commentators were again talking about of a ‘great rotation’ from bonds to equities; however far from rising, gilt yields actually fell to provide double-digit returns.
For iFunds’ investment manager Stacey Ash, gilt performance in recent months has highlighted two valuable lessons.
Firstly, he said you cannot always assume that the risk associated with an asset class remains static and, secondly, although a subjective analysis of an asset class may ultimately be correct, you may miss out on potential returns in the interim.
“Although UK equity volatility is near the lowest it has been over the past five years, we can see that gilt volatility has been increasing over recent months and is currently higher than it has been at any point over the same period,” he said.
“This rise in volatility saw our Spectrum multi-asset investment process drop all gilt positions in February of 2015. It did this not because it was able to predict a fall in gilts or because the trend in gilts had turned negative, but as a consequence of a rise in volatility.”
Ash added that while he has absolutely no way of knowing whether the recent rise in gilt volatility and gilt yields is the “start of the ‘great rotation’ or just a blip in a period of consistently low gilt yields,” he does know that his fund “certainly won’t be in the asset class if it’s the former”.
