A feature of investment markets this year has been the so-called risk-on, risk-off trade whereby investors have swung between an appetite for more risky assets like shares and commodities and a desire to play it safe in the perceived calm havens of government bonds and cash.
By Tom Stevenson, on The Markets
8:35PM GMT 13 Nov 2010
This jumpiness is part of a bigger trend away from the certainties of the pre-2000 equity bull market towards a foggier investment landscape in which investors are scrabbling around for three sometimes contradictory outcomes: capital security in a volatile world; a decent income in an environment of near-zero interest rates; and growth against a backdrop of deleverage and austerity.
The chart illustrates how much the investment world has changed over the past decade. In 2000 there was only one game in town. Around £8 of every £10 invested in UK mutual funds by private investors went into equities, with about £1 into bonds and the same into balanced funds.
Fast forward nine years to 2009 and a very different picture emerges. Last year, less than a third of net retail sales of UK funds was in funds investing in the stock market. A larger proportion went into bonds while much of the remainder went into absolute return and cautious managed funds. This is not just a UK picture. Figures compiled by Citigroup show that inflows into equity funds have been nothing to write home about across Europe (in fact they are negative pretty much everywhere outside the UK) while bond funds continue to attract money despite increasing fears in the eurozone periphery. The big winner has been balanced funds.
What this tells us, I think, is that investors are being forced out of cash and into riskier assets by persistently low interest rate policies but, despite the return to form of stock markets over the past 18 months, the pain of the "lost decade" and recent volatility mean that for most people equities remain a step too far.
The money that is going in to equities is largely chasing the perceived growth offered by emerging markets, which confirms the contradictory thinking driving asset allocation at the moment. Investors' desire for safety, income and growth all at the same time smacks of wanting their cake and eating it. This is leading to some pretty indiscriminate investment with not a lot of attention to which assets currently offer the best value.
There are some good technical reasons why investment flows should have shifted towards less risky assets. The matching of assets to liabilities by pension funds and the ageing of the average member of pension schemes are part of the story – as are greater capital requirements in the insurance sector. But something else less logical and more worrying seems to be going on. Investors yet again appear to be chasing past performance in a rose-tinted piece of extrapolation which assumes that last year's winners will inevitably be next year's too.
In 2000 the best-performing asset classes over the preceding five years in the UK were residential property, European equities and hedge funds. It is perhaps unsurprising that fund flows should have been so skewed. Jump to 2009 and the best-performing assets were gold, corporate bonds, gilts, German bunds and US Treasuries. Guess where the money is now going.
We know what happened to those caught up in the equity mania 10 years ago, so it is not unreasonable to ask what the returns will be 10 years hence on all the money currently pouring into precious metals, government bonds and emerging market equities.
History shows that the best way to invest is against the tide but not blindly so. Fund flows are only a part of the story because the ultimate determinant of eventual returns is the price you pay at the outset. In the case of emerging market equities, the multiple of earnings on which the average share trades is bang in line with global markets generally, according to Morgan Stanley's calculations.
When Japanese stocks peaked in 1989 it was at three times the global average, while technology stocks in 2000 were twice as expensive. Equities, emerging and developed, are much better value than government bonds – which is just what the fund flows are telling us.
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/8130470/For-most-equities-are-still-a-step-too-far.html
Main Points:
What this tells us, I think, is that investors are being forced out of cash and into riskier assets by persistently low interest rate policies but, despite the return to form of stock markets over the past 18 months, the pain of the "lost decade" and recent volatility mean that for most people equities remain a step too far.
Investors yet again appear to be chasing past performance in a rose-tinted piece of extrapolation which assumes that last year's winners will inevitably be next year's too.
In 2000 the best-performing asset classes over the preceding five years in the UK were residential property, European equities and hedge funds. It is perhaps unsurprising that fund flows should have been so skewed. Jump to 2009 and the best-performing assets were gold, corporate bonds, gilts, German bunds and US Treasuries. Guess where the money is now going.
History shows that the best way to invest is against the tide but not blindly so. Fund flows are only a part of the story because the ultimate determinant of eventual returns is the price you pay at the outset.
http://www.telegraph.co.uk/finance/comment/tom-stevenson/8130470/For-most-equities-are-still-a-step-too-far.html
Main Points:
What this tells us, I think, is that investors are being forced out of cash and into riskier assets by persistently low interest rate policies but, despite the return to form of stock markets over the past 18 months, the pain of the "lost decade" and recent volatility mean that for most people equities remain a step too far.
Investors yet again appear to be chasing past performance in a rose-tinted piece of extrapolation which assumes that last year's winners will inevitably be next year's too.
In 2000 the best-performing asset classes over the preceding five years in the UK were residential property, European equities and hedge funds. It is perhaps unsurprising that fund flows should have been so skewed. Jump to 2009 and the best-performing assets were gold, corporate bonds, gilts, German bunds and US Treasuries. Guess where the money is now going.
History shows that the best way to invest is against the tide but not blindly so. Fund flows are only a part of the story because the ultimate determinant of eventual returns is the price you pay at the outset.
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