Having a large slab of your portfolio in equity funds has been the sensible thing to do over the past six years or so with 98 per cent of funds in the Investment Association universe that focus on developed market stocks making money over the past three years.
Over five years the percentage is slightly higher at 98.5 per cent and the few funds that are not, and are generally sitting on huge losses, are all specialist energy or natural resources funds.
However, this year there has been suggestions that the bull run for equities is very much over, as Hawksmoor’s Jim Wood-Smith put it earlier this week, with most of 2015 being a painful time to put cash into the market.
Performance of indices of 2015
Source: FE Analytics
He said: “Global equity has passed an inflexion point. The bull market is over.”
It also appears that equities are becoming less popular with more cautiously minded fund managers with the ability to move between bond and equities.
Multi-asset funds in the IA Mixed Investment 0%-35% Shares have, taken on average, been shedding their equity exposure and buying fixed income this year with the portion the sector has in stocks sitting at its lowest for at least three years with cash at its highest over the same period.
NN Investment Partners head of multi-asset Valentijn van Nieuwenhuijzen says his portfolios across the risk spectrum are now underweight equities for the first time in more than three years.
He thinks there is less money to be made from stocks in the coming years while the risk of downside is increasing with the likelihood of volatility high since Black Monday’s sell-off.
Peter Fitzgerald, head of multi-asset at Aviva Investors, disagrees and has been adding to exposure in equities since this day. However, he has favoured stock markets in Japan and Europe over the UK.
“The outlook for the global economy remains positive and recent events do not appear to warn of a significant global downturn or recession. Worse than expected Chinese growth and the first US rate rise since 2006 are legitimate concerns for markets, but both seem to have been largely ‘priced in’ to asset valuations for some time. We do not believe that tighter US policy will derail the recovery,” he said.
“As a result, we have added to equity positions in continental Europe, Japan and the US [since August] and view any further bouts of extreme volatility as an opportunity to add exposure to these regions.”
Performance of indices since Black Monday
Source: FE Analytics
Nonetheless he says assets and securities outside the equity space that are likely to do well in choppy stock markets is increasingly important.
“Whilst volatile markets can present opportunities, holding risk-reducing positions designed to perform well during market crises are important. For instance, as the outlook for emerging markets and commodity prices deteriorated, we profited from an Australian rates strategy,” he said.
“The position aims to benefit from a slowing Chinese economy that prompts weaker Australian output and a worsening outlook for Australian bond yields. Additionally, a risk-reducing ‘long’ position in the dollar against the Mexican peso performed well as demand for ‘safe-haven’ assets such as the US currency rose.”
Such ‘trades’ and the funds that specialise in them are in high demand. Data from the Investment Association show while equity continues to be the best-selling asset class with net retail sales of £503mi, there is a disparity in between private and professional investors.
Daniel Godfrey, chief executive of the Investment Association, said: in terms of asset allocation, investors appear to be sticking with equities – particularly equity income funds – whilst withdrawing money from bonds, perhaps in expectation of an interest rate rise.
However, broken down further the numbers show institutional investors have been buying mostly absolute return funds over the past year or with these topping the tables for 10 out the last 11 months in a row. Retail investors have instead continued to pile into equites with seven out 11 months all having UK equity income as the best selling sector.
Jamie Hooper, manager of the £256m AXA Framlington UK Growth fund, says UK stocks in particular may have entered a mature stage in the economic cycle but he argues equites are still the best game in town.
“Many strategists have ‘given up’ on UK equities. With a record current account deficit, frothy housing market and a labour market approaching full employment the bears wonder where the upside is,” he said.
“The UK stock market suffers from a heavy concentration of collapsing commodity stocks – declining Chinese demand and surplus supply – and bond proxies such as utilities and staples, which historically under-perform in periods of rising interest rates. Add sterling strength hindering exports and the risk of ‘Brexit’ in to the mix and one may rightly have sympathy with their cautious stance.”
“However, if we are indeed in a mature phase of the current equity cycle, the final push often produces very good returns. Many preconditions for the next bear market such as recession, over-valuation and excessive corporate debt, are not yet in place.”
Hooper says there are plenty of reasons not to fear a sharp slowdown in economic growth or an end to low interest rates heralded by a rate rise from the Federal Reserve.
“Analyst recommendations are as cautious as they were in 2003 and 2009. Monetary conditions remain loose, while employment, wage growth and weak commodity prices assist the revived consumer,” he said.
“Meanwhile M&A activity is booming. The valuation of UK equities remains very attractive relative to bonds, especially if inflation returns in 2016.”