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Bonds fall out of favour

Bonds proved to be an unpopular choice when the Adviser Fund Indices were last rebalanced on May 1.

All three benchmarks were underweight in fixed interest, when measured against the comparable Association of Private Client Investment Managers and Stockbrokers’ portfolios.
Fixed interest has since come back into favour with retail investors following the sharp equity market corrections which began in mid-May. Over 1bn of retail money flowed into the IMA’s bond sectors in May, June and July compared with just 400m for equity-based portfolios. However, it appears the AFI panellists are still reluctant to consider the asset class.

Allenbridge group director of fund research Jonathan Wallis says: “Our house view is that we are not too excited about bonds. We will have an allocation but, in terms of total return, bonds are not interesting. Interest rates are probably on the up, although they will not rise much compared with before. Pension funds have ramped up prices and that is not fully out of the system. If rates go up, bonds have nowhere to go.”

Wallis prefers to use property as a means of diversification, despite concerns it has become an “over-hyped” investment. He says: “We have introduced property as an alternative form of safe income and, although it is not a risk-free asset, it has performed well. As a source of income, it compares favourably with bonds. You will not get the excep- tional returns we have seen before but it is still a reasonable asset class.”

Five property funds – from New Star, Norwich Union, Scottish Widows Investment Partnership, M&G and Standard Life Investments – feature across the AFIs.

City Asset Management investment director Hilary Coghill says she has been negative on bonds since the start of the year. She recommends Artemis high income, which features in both the Balanced and Cautious AFIs, but this is primarily because of the flexibility allowed in the UK-other bond sector.

She says: “The fund’s equity exposure has been a fillip. It has about 20 per cent in equities, the maximum under IMA rules.” Overall though, Coghill prefers to use commercial property and hedge funds for diversification in City Asset Management’s own portfolios.

Coghill says she is comfortable with exposure to equities, despite the prospect of more volatile times ahead. She says: “We thought the markets would be sideways over the summer and it has been. There are two polarised views. One is that US housing will suffer and consumers will go away, causing a recession. The other is there will be a soft landing and no real problem. We are not sure which is the right scenario, but are happy to remain exposed to equities. We may need to be quite active in taking risk off the table in future though.”


Geography lesson

Asset allocation decisions for investors are implicitly and explicitly influenced by their attitude to the US. Wall Street is the biggest market, the US is the biggest economy and, courtesy of a high spending consumer, has been the dominant source of growth in economic activity – the catalyst of the recovery.

Greece: the sideshow continues

Artemis managers James Foster, Mark Page and Laurent Millet comment on the Greek deal, describing it as “just another fudge” getting in the way of bigger developments in China, the UK and the US. To read the full article click here.


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