Follow the herd or follow Warren Buffett? That sounds like it should be a pretty simple choice for most investors given the average investor's consistent ability to buy and sell at the wrong time and the sage of Omaha's ranking as one of the world's richest men.
Warren Buffett told a conference he couldn't imagine anyone having bonds in their portfolio when they could have equities Photo: GETTY
Curious then that Mr Buffett is doing a passable imitation of Cassandra – she who was cursed so that she could foretell the future but no one would ever believe her.
Here's Buffett, speaking last week to Fortune magazine's Most Powerful Women Summit: "It's quite clear that stocks are cheaper than bonds. I can't imagine anyone having bonds in their portfolio when they can have equities ... but people do because they lack the confidence."
And here's what everyone else is doing. According to Morgan Stanley, the speed of inflows to bond funds is even greater than retail inflows into equity funds at the height of the technology bubble in 2000 – $410bn (£256bn) in the 12 months to April 2010 in the US versus $340bn into equities in the year to September 2000.
Over here, too, investors can't get enough fixed income. According to the Investment Management Association, net sales of global bonds and corporate bonds both exceeded £600m during August. Only absolute return funds were anywhere close to these inflows. The staple British equity fund sector, UK All Companies, saw £291m of redemptions and even the previously popular Asia ex-Japan sector raised a paltry £22m.
So, is this a bubble waiting to burst or a logical investment choice in a deflationary world where interest rates could stay lower for longer as governments adopt more desperate strategies to prevent another slump?
The case for bond prices staying high has received a boost in recent weeks as speculation has grown that the US government is contemplating a second round of quantitative easing. Printing yet more money to buy bonds creates a buyer of last resort and would underpin the price of Treasuries even at today's elevated levels.
Indeed, the talk on Wall Street has turned to a measure the US government has not employed since the Second World War when a target yield for government securities was set with the implied promise that the authorities would buy up whatever they needed to keep the cost of money low.
Ben Bernanke, the Fed chairman, referred to this policy in his famous "Helicopter Ben" speech of 2002 when he reminded financial markets of the US government's ultimate weapon in the fight against deflation – the printing press. It really is no wonder that the price of gold is on a tear.
For a few reasons, however, I'm not convinced that the theoretical possibility that interest rates could go yet lower à la Japan makes a good argument for buying bonds at today's levels.
First, to return to fund flows, extremes of buying have in the past been a very good contrarian indicator of future performance. Equity flows represented around 4pc of total assets in 2000 just as the bubble was bursting. At the same time, there were very significant outflows from bond funds just ahead of a strong bond market rally.
My second reason for caution is illustrated by the chart, which shows how little reward investors are receiving for lending money to the US government (and the UK, German or Japanese governments for that matter). Accepting this kind of yield makes sense only if you believe the US economy is fatally wounded and that the dragon of inflation has been slain. I don't believe in either thesis.
History shows very clearly that investing in bonds when the starting yield is this low has resulted in well-below-average returns if and when rates start to rise. Between 1941 and 1981, when interest rates last rose for an extended period, the total return from bonds was two and a half times lower when the starting point was a yield of under 3pc than when it started above this level. Investing when yields are low stacks the odds against you.
My final reason for caution is that there is no need to put all your eggs in the bond basket. Around a quarter of FTSE 100 shares are yielding more than 4pc while the income from gilts is less than 3pc. More income and the potential for it to rise over time too. I'm with Warren on this one.
Tom Stevenson is an investment director at Fidelity Investment Managers. The views expressed are his own.
http://www.telegraph.co.uk/finance/comment/tom-stevenson/8052896/Why-Im-with-Warren-Buffett-on-bonds-versus-equities.html
No comments:
Post a Comment