However, last week saw markets wobble, with many blaming this on a speech by US Federal Reserve chairman Ben Bernanke in which he spoke about the possibility of the US beginning to withdraw from its QE programme.
Performance of indices over 1yr
Source: FE Analytics
However, Hollands thinks the cause is more likely to be concern about a slowdown in Asia.
“In my view it’s a confluence of factors, but more driven by poor manufacturing data from China,” he said.
“The Fed minutes only said that they may start to reduce QE if economic conditions continue to be good,” he added.
Whatever the case, the wobble underlined the need to assess whether your portfolio is prepared for the end of the massive monetary stimulus that has been on-going for several years.
Indeed, the reason Bernanke floated the prospect is that benign conditions in the markets in recent months have increased investor confidence that a slow recovery may be under way.
The Federal Reserve programme will start to cease the QE programme if a sustained period of economic recovery is seen, Bernanke says.
Hollands (pictured) warns that whenever the authorities do ease back on QE it will have a dramatic effect on investors still holding bonds.
“Clearly, if the market really was starting to price in an end to QE, that will be very bad for the bond markets,” he said. “There have been major distortions in a number of assets caused by QE and there’s a day of judgement coming in the bond market.”
Investors would have made more money from being in bonds over the past five years than equities, data from FE Analytics shows.
The iBoxx Sterling Overall All Maturities index, which tracks the performance of UK government and corporate bonds, has made 43.91 per cent over five years as the FTSE All Share has made 36.67 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Bonds have been sought after as places of safety from volatile stockmarkets, but the rising prices are being supported by the massive bond-buying programmes of central banks.
“Investors have become used to central banks continuing to buy bonds, but there will be a time when that stops,” Hollands said.
However, investors should not assume that being in equities rather than bonds can save themselves from the eventual sell-off, Hollands warns.
He points out that the end of QE could potentially be catastrophic for stock market investors, too.
“What it would mean for equities depends on whether it has had the impact of getting the economy going which it is intended to,” he said.
“But obviously if that isn’t the case, and the economy isn’t making headway, you have the potential scenario of a sell-off in both bonds and equities.”
Hollands says the uncertainty puts cautious investors in particular in a tough position, particularly those who want income.
“I think there are no safe havens at the moment,” he said. “There have been a lot of distortions in asset prices because of QE.”
“Traditional safe havens have arguably become more risky and offer less protection.”
One solution open to investors, Hollands says, is to go for absolute return funds, which use derivative strategies to produce positive returns in rising and falling markets.
However, the track record for those funds is patchy at best, as Hollands acknowledges, and they generally don’t pay dividends.
Standard Life Global Absolute Return Strategies is the most popular fund in the absolute return sector, according to inflows data from FE Analytics.
The fund has made 45.18 per cent over the past five years as the FTSE All Share has made 36.67 per cent, and it has also been much less volatile. It doesn’t pay a yield.
Performance of fund versus equities over 5yrs
Source: FE Analytics
“Those that do deliver tend to be more focused on capital return than income, so if you are a very cautious investor and you also want income they aren’t a realistic option,” Hollands said.
Investors have no realistic choice but to have a decent weighting to equities in the current circumstances, Hollands explains.
“You have got to take risk, and that’s a large part of what QE is about.”
However, he says that investors with a long-term perspective shouldn’t be concerned with the events of the past few days, which don’t change the long-term prospects for equity investors.
“Equities are a volatile asset class. As we have seen today [Thursday] in the last 24 hours on the Asian markets.”
“You are always going to get some sort of correction in equities and arguably Japan was over-bought, so that’s not unexpected.”
“Do I think equities will be much higher in three years? Yes, I do. Will I still be a buyer? Yes, I will.”