As 2013 draws to a close, I have to say that it has been a most fascinating year from an investment point of view.
It will certainly go down as the year when the ‘great rotation’ from bonds to equities never really materialised and one where we continued to see unprecedented amounts of liquidity pumped into the financial system. Meanwhile, it was also a year where we finally said goodbye and, from a multi-asset point of view, good riddance to so called risk on/risk off.
At first glance, it would appear that it would have been pretty difficult not to have made a decent return in 2013. Global equities gained around 20 per cent, while areas, such as high yield corporate bonds and more recently UK commercial property, have also rewarded investors with some healthy returns.
But it has not been completely plain sailing for investors. Just ask any remaining gold bugs who have watched the yellow metal lose around a quarter of its value, while for those invested in gold shares, the experience has been considerably more painful. Commodity prices generally have fallen in value this year, with many, including ourselves viewing this as a welcome development given the sector’s extraordinarily high correlation with equities over the last few years.
For fixed income investors it has been a mixed bag. There has been no bursting of the so called bond bubble, although gilts have certainly deflated with yields having risen from record lows earlier in the year. But corporate bonds have continued to benefit from a benign corporate sector and low default rates, as well as the ongoing hunt for income. This has been particularly evident in the high yield space where the asset class has produced a solid single digit return with relatively little volatility.
Equities as a whole have produced excellent returns in 2013, with the US market having hit a record high in November. The stand out winner, in local currency terms, has been Japan, where share prices have enjoyed huge gains on the back of money printing by the Bank of Japan. But it has been a dismal year for emerging markets, which have suffered from concerns over their future level of economic growth, current account deficits and the withdrawal of liquidity by the Fed.
Passive investors appear to have gained the upper hand in terms of fund flows.
The active versus passive debate is well known to all of us, but I find it ironic that in a year where tracker funds have grown so rapidly, it has been active funds that have produced superior returns in all the major markets including, wait for it, the US.
There is room in the investment world for both active and passive strategies. However, the more money that tracks a particular index, the less efficient that index becomes and the more opportunity that must produce for the many good quality active managers that are thankfully still around.
Looking forward to 2014, it looks like monetary policy is going to remain highly accommodative even though there is likely to be a pick up in global economic activity. Against this backdrop, we continue to favour equities over bonds, although with shares having performed so well over the last 12 months it is worth remembering the old stockmarket adage of ‘it is better to travel than arrive’.
David Hambidge is director of Premier Multi-Asset Funds