Markets appear to be succumbing to what has been a never ending stream of macro issues since January, starting with Libya and Japan and ending with no resolution to the eurozone debt issues and political stalemate in the US. It has not exactly been an annus horribilis for investors, although it could still turn out that way, but 2011 is not a year that many fund managers will look back on with any satisfaction.
Bank rate is likely to remain at 0.5 per cent for some time and with inflation remaining high, the dilemma for savers will continue to be either to stay in cash and watch their purchasing power erode or switch into risk assets.
There seems to be a strong demand for relatively cautious managed funds and this is likely to continue through 2012 but I get the feeling that investors are becoming increasingly frustrated with performance of the absolute return sector which has been found guilty of over-promising and under-delivering on returns over the last few years.
The one theme that seems likely to run and run is the search for yield. Income-hungry boomers are reaching retirement age and it would seem there will be significant opportunities for investment houses with a decent range of income funds.
A result of this demand for yield should be a re-rating of income-producing assets. This bodes well for areas such as UK equity income, which has had more than its fair share of mishaps over the last few years, while global equity income funds are also likely to continue to grow in popularity. We prefer those funds which have a genuine commitment to the needs of income investors either by providing a high initial yield or an emphasis on growing their distributions.
We continue to avoid the gilt market. Yields on UK government securities may have fallen significantly since Pimco’s Bill Gross referred to the asset class as “resting on a bed of nitroglycerine” last year, but the somewhat artificial nature of this market makes it one to avoid.
Liquidity issues have returned to large parts of the corporate bond market but once the fog of fear lifts we would expect the relatively attractive income characteristics of these funds to again attract strong demand.
One area where we have been increasing our exposure recently is listed infrastructure. This offers the prospect of a relatively high and rising income stream from largely operational government backed infrastructure projects as well as the prospect for modest capital growth. Being quoted on the London stock exchange, care needs to be taken as share prices can sometimes get ahead of events, although, given the ongoing demand for this type of asset, their premium rating looks likely to remain intact.
David Hambidge is investment director of pooled funds at Premier Asset Management