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Bull’s eye

Fortune favoured both the brave and the not so brave in 2010, with the year turning out to be highly satisfactory for most asset classes.

However, investor sentiment was tested by a string of events including financial problems in Greece and Ireland, the BP oil disaster in the Gulf of Mexico and tensions between North and South Korea.

Equities outperformed for the second consecutive year, with growth stocks performing considerably better than value plays and smaller companies again outperforming large caps.

The year turned out to be more than OK for UK equities, particularly mining stocks and other companies with a decent exposure to overseas earnings.

Japan was the standout laggard, although sterling investors were bailed out by the strength of the yen while Europe and the euro struggled against a backdrop of growing debt concerns in Greece, Ireland et al.

In Asia and emerging markets, investors were undeterred about rising inflation, excess of foreign capital and talk of bubbles, with equities again producing superior returns. In the US, stocks also continued to climb the wall of worry.

It was another strong year for both investment-grade and especially highyield bonds. The former benefited from a combination of lower government bond yields and declining credit spreads and the latter from lower defaults and ongoing investor demand for income.

The policy by Western central banks of suppressing bond yields had a positive impact on commercial property, although having enjoyed a strong recovery since the summer of 2009, price rises have slowed significantly over the last six months.

The consensus view is equities will make further progress this year but will again be volatile. There are reasons to be bullish with corporate balance sheets in good shape and companies continuing to take advantage of low bond yields to issue cheap debt while the demand is still there. Add to this, the likelihood of further M&A activity and the fact that equities remain better value than a number of other asset classes and it could be easy to claim the glass is at least half-full.

Significant headwinds remain, not least in the eurozone where the issues over its peripheral (and perhaps not so peripheral) members are yet to come to a head. Add to this rampant commodity prices, including oil close to $100 a barrel, and the prospect of higher interest rates at some point and it is easy to remain cautious.

Against this backdrop, our portfolios remain well diversified with a bias towards high quality lower-beta equities which offer good long-term value and, to a lesser extent, smaller companies which we believe will benefit from M&A activity.

Elsewhere, we remain underweight bonds with a bias towards relatively short-dated investment-grade and high-yield credit, as well as some floating-rate issues as a hedge against rising interest rates.

Open-ended commercial property remains a no-go area (due to cash drag), although value remains in selective closed ended funds while we have again been building up exposure to closed-ended infrastructure funds which offer a combination of steady cashflows and some inflation protection.

David Hambidge is investment director of pooled funds at Premier Asset Management

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