The Adviser Fund Index series performed strongly in 2009. According to Financial Express, all three indices outpaced their Investment Management Association and Association of Private Client Investment Managers and Stockbrokers benchmarks. Outperformance was most pronounced in the AFI aggressive index, which returned 29 per cent – beating the Apcims Growth portfolio by nine percentage points.
But AFI panellists are not expecting a repeat of such performance in 2010. Ashcourt Rowan head of research Tim Cockerill and City Asset Management chief investment officer Hilary Coghill are both cautious on prospects for fixed income in particular. Cockerill says he expects the pattern of redemptions from the IMA’s sterling corporate bond peer group to continue.
IMA data shows the sector suffered net retail outflows of £12m and £10m in October and November, a sharp reversal of significant inflows in the first nine months of last year. “Corporate bonds probably will not perform like they did in 2009 for another 50 years, and investors are very aware of that,” says Cockerill. “If the recovery continues, it is equities that will benefit.”
Cockerill and Coghill say much depends on how and when the Bank of England halts its quantitative easing programme. Since January last year, the bank has created over £190bn in new money to fund the purchase of high-quality fixed-income securities – mostly gilts.
Coghill has reduced her allocation to corporate bonds and says it is a “potentially dangerous” asset class this year. “Investment grade has done so well but it now looks fully-valued,” she says. “When quantitative easing comes off, it will have an impact on investment grade as well as gilts.” Coghill favours strategic bond funds for her fixed income exposure, because of their flexibility and ability to use derivatives.
Cockerill is also wary on emerging markets equities on a one-year outlook. Global emerging markets was the second-most popular IMA sector among retail investors (after property) in November, reflecting renewed optimism on the region. Separate surveys by JP Morgan Asset Management and Virgin Money suggest that advisers are more bullish on emerging markets than any other equity region in 2010.
“In the long term. I have no problem with investing in the emerging markets – the shift will continue from West to East,” says Cockerill. “But for the short term, there is a lot of hope attached to valuations. What is being overlooked is that America is still the dominant economy, and growth in the emerging markets has been driven by exports.”
Coghill is overweight in emerging market equities but also cautious on the region in the near term. “Money will flow into those markets, but they will be volatile,” she says, “A lot of emerging market managers we see are saying equities are fully valued.”