Gilts get the edge on faltering bulls

Investors are regaining their nerve after a weaker economic outlook and geopolitical worries caused a shakeout in shares and a rush to safe havens


This has not been the easiest year for investors. It may have started with plenty of promise but a weakening economic picture alongside continuing troubles in the Middle East and Ukraine combined to unsettle investors and bring what looked like a promising bull market to an apparent close. I say “apparent” because the shakeout in shares was relatively short lived, with investors regaining their nerve as the autumn progressed.

Deadlines being what they are, the performance data used in this article only covers the period until the end of October, since when a further recovery was underway. Even so, little of major importance had occurred during November, although markets had resumed their upward trajectory. The switch, though, from a risk-on approach to risk-off clearly had an important effect on fund performance.

UK Index Linked Gilts, arguably the safest haven among the IMA sectors, delivered the best average performance for the 10 months to the end of October, and this during a period when the rate of rise in the cost of living indices was seen to be falling. Indeed, only two equity sectors made it into the top five, with North America a close second so far as the performance of the average fund was concerned.

The US has been the success story of the recovery from the financial crisis of 2008. A combination of an improving economic picture and the development of its shale oil and gas deposits, which could see the nation self-sufficient in energy before too long, has encouraged investors into equities.

Both the S&P 500 and the Dow Jones Industrial Average have broken into new high ground during the year. And while the US was not immune to the shiver that travelled through global markets in the early autumn, it staged by far the most convincing recovery.


Indian turnaround
The recent dollar strength has also helped investors. Yet, remarkably, no US funds feature in the top 10 best performers so far this year. Indeed, the top five, plus the seventh-ranked fund, JP Morgan India, all reflected the remarkable turnaround achieved in the Indian sub-continent.

Indian funds are contained in the IMA Specialist sector, which finds itself mid-table with an average rise of 3.5 per cent. And it must be acknowledged that such specialist funds are unlikely to find their way into the majority of portfolios.

Ranking third in the sectors is Property, which I covered recently. Arguably their presence at the top of the performance tables, along with two gilt sectors, underscores the defensive approach investors have been taking. Perhaps there is more of a message to be found at the bottom end of the spectrum.

Again, the worse-performing funds do not fall into any defined category, with four within the Specialist sector and one, the £50m CF Holly fund, rated as unclassifiable. However, the presence of two Russian specialist funds at the bottom of the tables must surely come as no surprise, given the twin pressures of a falling oil price and western sanctions imposed as a consequence of Russia’s interference in Ukraine on that country’s economy.

The inclusion of Peter Webb’s Webb Capital Smaller Companies fund in the bottom five is less surprising than one might think for a manager with a commitment to small-cap stocks extending over many years, given that UK Smaller Companies was the second-worst performing sector. European Smaller Companies did even less well for investors, but only two funds – from JP Morgan and Jupiter – featured in the bottom 10.

It is perhaps unwise to draw too many conclusions from such a short time-frame, particularly one in which conditions have proved so volatile. However, it is worth making the point that there seems little upside left in some of the more defensive sectors, such as UK gilts, though it is hard to see what might tip them into reverse.


Equities under par
Among equity sectors, the US seems well up with events, but again, the encouraging economic data and the apparent end to monetary easing will give investors comfort.
None of the UK equity sectors have proved successful areas to back recently, with the best-performing, UK Equity Income, just delivering a positive total return over the 10 months and coming in tenth from the bottom.

Even here, despite a more robust economy than those that can be found in Europe, there are concerns that contagion from the eurozone could prove damaging, while next year’s general election, arguably the most difficult to predict in terms of outcome since the second world war, adds further uncertainty. The future, it seems, is as opaque as ever.

Key Takeaway After a positive start, 2014 became trickier as doubts emerged over the strength of the global economy. Geo-political issues added to concerns as sentiment dipped in the early autumn. This led to renewed demand for secure government debt, but the risk now exists that these could suffer if inflation picks up or economic activity regenerates. Right now there are no signs of either happening, but managers need to be alert to any change in temperament in both areas.