Okay, so a lot of attention this week has been focused on the FIFIA corruption scandal and whether Sepp Blatter will stay on for a fifth term as the organisation’s president. But things have been happening in the markets as well.
Most stock markets might have ended the week pretty much where they started but there’s been plenty of ups and downs to get there, prompted by nervousness in the bond markets, Greece’s financial weakness and, in the case of Shanghai, moves to tighten up on margin trading.
The return of volatility has prompted rather downbeat comments from many of the fund managers we’ve spoken to this week, so apologies if our best stories round-up makes for depressing reading. From everyone at FE Trustnet, have a great week.
Harris: Investors could be in for a “brutal” end of the year
Following a strong 2014, the recent sell-off in bonds has dominated financial headlines and means that every fixed income sector apart from IA Sterling High Yield has failed to make a positive return since the start of April.
Performance of indices in 2014
Source: FE Analytics
City Financial head of multi-asset Mark Harris warned that this could just be a hint of the turmoil that is likely to hit bond markets later in the year if the Federal Reserve embarks on its much-anticipated first interest rate hike.
Harris expects a decent period from bonds over the coming months as the market becomes concerned about weak US GDP figures but then severe volatility in September as growth bounces back and the US Federal Reserve is forced to push up interest rates.
“Is this a correction or a change in trend? That's the big question for everyone. We are still working it through but I suspect, at this stage, it is more of a correction than a complete trend change,” he told FE Trustnet.
“However, we think it is extremely difficult to make money from bond markets at the moment but it is easy to lose money and lose it very quickly. It is a very challenging environment that will trick a lot of people. If that is a warning shot of what we believe could occur later in the year, it is going to be fairly brutal because liquidity just dried up.”
Marcus Brookes: The funds I’m buying to cash in on falling markets
Marcus Brookes, head of multi-manager at Schroders, is another manager who is preparing for further volatility in the markets and using a number of funds to diversify his portfolios.
The manager is wary about the future of the bond market, seeing vast parts of it as being overvalued after years of unprecedented monetary easing by the world’s central banks. Likewise, he is cautious on property – a go-to diversifier for many investors – as he believes the asset class will be adversely affected by rising interest rates.
“Alternatives is the bit [of the market] we think should give us pretty decent returns in what could be a fairly shady market. We are six years into a bull market – that’s quite a long way,” the manager said.
One of the funds being used by Brookes to diversify his portfolios is Matthew Smith and Tom Norris’ Majedie Tortoise , which is a top 10 position in his £1.4bn Schroder MM Diversity, the £293m Schroder MM Diversity Balanced, the £213m Schroder MM Diversity Income and the £170m Schroder MM Diversity Tactical funds.
Performance of fund and indices over 8yrs
Source: FE Analytics
The headwind that hasn’t yet rattled the markets
In keeping with the rather downbeat theme of the previous articles, JP Morgan Asset Management global multi-asset market strategist Kerry Craig pointed out that the market seems to be ignoring the risk that Greece will leave the eurozone.
The negotiations between the Greek government and the rest of the European Union have never been far from the headlines over recent months, but at the same time many equity markets have climbed to new record highs despite a lack of progress.
“Across the channel the headwind is Greece to my mind,” Craig said. “Again, it’s getting a lot of press but has largely been put to one side by the markets – you’re not seeing any contagion in equity markets or fixed income markets.”
“With Greece, they very much are going to run out of money in a couple of weeks and they’ll only be able to make those payments to the IMF [International Monetary Fund] and the ECB [European Central Bank], and even to their own workers and pensioners, if they do get some sort of disbursement of that final bailout package given to them in the next couple of weeks.”
“The market really is discounting any chance that Greece is going to leave – you’re not seeing it in any of the equity or fixed income markets to the extent that it should be and that’s because everyone really does believe that they won’t leave.”
Does your portfolio need an absolute return bond fund?
Given widespread concerns over the future direction of the bond market, some investors have turned to fixed income funds with an absolute return mandate in the hope of generating returns even in a down market.
Bambos Hambi, head of fund of funds at Standard Life Investments, makes use of absolute return bond funds and has recently added the BNY Mellon Absolute Return Bond fund to his MyFolio Multi-Manager Growth and Income ranges after selling out of Pimco GIS Unconstrained Bond.
“This is run by the Insight team. Many years ago I worked with the majority of that team over at Rothschild Asset Management and they are highly rated. My team rate them very highly and this is a fund that just ekes out returns,” Hambi said.
“It’s not taking big bets, it just looks for cash plus 2 or 3 per cent. It has lots of different sources for adding value and interestingly over the last four weeks we’ve seen some bond funds fall up to 8 per cent but this is up 0.4 per cent. It’s doing exactly what we expect from it.”
The only UK income fund to have paid you back in dividends
Of course, we did manage to write some more upbeat articles last week and one looked at the IA UK Equity Income sector to see how many funds have paid back an investor’s initial investment over the past 15 years through its dividends.
Only one has managed to do so: Schroder Income, which has headed by the FE Alpha Manager duo of Kevin Murphy and Nick Kirrage since May 2010. Before that it was managed by Ian Lance and Nick Purves (who now work at RWC), while Humphrey Van Der Klugt and Jupiter’s Ian McVeigh have managed the fund in the past.
Investors who bought £10,000 worth of units in May 2000 would have since been paid £11,259.48 in dividends. This is £3,555.32 more than the average fund in the sector and even £1,359.74 more than Invesco Perpetual Income, which ranks second on the list.
Source: FE Analytics
A quarter of UK adults completely clueless about pension reforms
Over on Trustnet Direct, Anthony Luzio looked at a study from consultancy Avacade Future Solutions, which indicated that 12 million people over the age of 18, or one quarter of the adult population of the UK, are completely ignorant of the recent pension reforms.
The study also showed that of the people who are aware of the reforms, 47 per cent were dissuaded from taking advantage of them due to a lack of finance, confidence or fear of making mistakes.
Luzio looked at some of the ready-made portfolios available on Trustnet Direct for people whose lack of financial knowledge is preventing them from taking a lump sum out of their pension to invest themselves.
For example, the Income Generator aims to provide a regular income without eroding the original capital investment. It invests in a diversified selection of income-generating funds that have historically performed better than others in their sector.
