As if to illustrate the point, it is noticeable that more than one of the top 10 over three and five years are close to the bottom of the second quartile over one year. Is this because they did not move; they did move but early in the cycle; or the manager changed as they seem to do with increasing regularity?
Lighting the fuse
Special situations managers seem to have produced reasonable returns across the timescales, presumably due to the funds having fewer holdings and the managers being good stockpickers.
In the same vein, it is noticeable that the recovery funds have not done well because recovery stocks have not recovered. Their time may come once quantitative easing has worked its way out of the global system. This, however, could take quite some time in markets other than the US.
Speaking of the US, large UK growth stocks have continued to be popular due to their high content of dollar earnings propelling them to unsustainable price/earnings ratios. Add to that the precarious situation with regard to dividend cover in a number of favourites and we could have an explosive mixture should the confidence fuse be lit.
That fuse could well be the rising yield on bonds. The UK 10-year gilt yield has leapt by around 80 basis points in a short period and the 30-year yield has also grown dramatically. Where the 10-year was yielding as low as 55bps, it is now above 130bps and rising.
This does not bode well for the so-called ‘bond proxies’: that is low-risk, high-quality companies with shares yielding substantially in excess of bonds, but with bond-like characteristics. Utilities such as water and power companies would fall into this category.
The search for yield during the past five years has led many institutional investors to these stocks. Once bond yields start to look respectable again these investors will rotate back into bonds, as they are deemed to be safer, and the price of bond proxies will fall.
