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Investment View

So, here we are in May, the month for cutting and running if you are a stockmarket investor. Of course, there is little evidence to suggest that there is any real reason to consider this a prudent course of action in contrast to the situation in December and January, when it is usually sensible to be fully invested. Then you have fund managers window dressing and fund flow into US pension schemes to contend with. But I imagine that more than a few investors will be wondering whether, this year, taking in the season may not only be more enjoyable than concentrating on matters financial but more profitable as well.

There is usually not much in the way of news during the lazy days of early summer, with the interim reporting season not due to start until the end of July. It even tends to go quiet on the political front although this year we could have a general election to contend with. Indeed, if there is any reason to subscribe to the “sell in May” theory, it must be one of boredom.

The problem comes in knowing what to do with any money you raise if you do sell your equities. Cash is hardly an exciting prospect at present. Rates are low and likely to go lower still. There are always bonds but they seem to have enjoyed resurgence recently. Why buy into an investment area which has already outperformed and which offers potential returns that will hardly set the world on fire? But the truth is that the bond market is far more complex than many realise.

Looking through the Barclays equity/gilt study, it is clear that bonds have not been quite the long-running dog that many pro-equity managers would have you believe. The situation has been distorted by the very high interest rates that were around in the 1970s. True, equities would have served you best over the very long term but they did not race away until comparatively recently. Perhaps bonds could have their time again.

The bond market has changed dramatically over recent years. For a start, there is less Government paper around. The corporate bond market, on the other hand, has blossomed and, led by the US, now offers a real alternative to equities for investors. It can be just as volatile, though.

With the development of the US corporate bond market has come the growth of credit rating agencies. They now define how bonds are likely to be priced – both when issued and in the after-market. In broad terms, the bond market is divided into two – investment-grade and sub-investment grade. Investment-grade bonds are those that enjoy a BBB rating or above. But you can be certain that slipping from a single A to a triple B can be fairly traumatic for the issuing company, just as falling out of the FTSE 100 is not generally something chief executives of major corporations relish.

It happens that the lower the investment rating, the better the overall return – or at least that is what the US experience suggests. Of course, this assumes a number of things. Income being reinvested, for example, and a very wide spread across the whole universe of available bonds, hardly possible for all but the biggest investor.

What we have seen is a growth of specialist bond management houses and funds growing up, exploiting what is becoming an increasingly professional part of the industry and servicing a growing demand from investors. For all I know, bonds maybe the best prospect for the weeks ahead in what I fear will remain a difficult year. But there are enough imponderables to make me view them with as much caution as I have always viewed the equity market – probably your friend but certainly not somewhere to venture without having made careful preparation. Investors seeking alternatives to equity markets should bear this in mind when building their strategy.


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