Multi-managerMay 28 2013

Fund Selector: Equities better than bonds

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ByJohn Chatfeild-Roberts

A key question in investors’ minds has continued to be the extent of the rotation away from bonds and into equities.

In the current regulatory environment, investment advisers are under pressure to recommend ‘risk-targeted’ investment solutions because they tick the right box in terms of satisfying their clients’ attitude to risk.

This would seem like a good idea, but it can have problematic consequences, particularly if it encourages cautious UK investors to buy products full of low yielding bonds at precisely the wrong time.

Some bonds continue to look reasonable and these are represented in the Jupiter Merlin portfolios, but others offer what can only be described as ‘return-free risk’.

The UK 10-year gilt, for example, yielded 13.9 per cent back in 1989 and nobody wanted to touch it. Today the nominal yield on this supposed ‘risk-free’ asset is a paltry 1.69 per cent.

Take into account inflation as measured by the consumer price index (CPI) and the UK 10-year gilt offers a real yield of -1.11 per cent per annum, if held to maturity. In other words, the investor would be guaranteed to lose purchasing power.

We do not think it is right for cautious investors to be hamstrung by the lack of flexibility offered by some risk-targeted solutions at a time when quantitative easing has allowed Western central banks to depress the yield on government debt to unprecedented levels.

Someone will pay for the financial crisis that afflicts the UK, but the team is determined to ensure its investors do not suffer from being boxed into owning the wrong assets at the wrong time.

In its view, inflation is the enemy. Official CPI might be only 2.4 per cent (April 2013) but, in the team’s view, real inflation is closer to 6 per cent (or more) per annum for many.

Inflation robs the saver and bails out the reckless borrower, and we are not prepared to wait 10 years to see if we are right. Is important to act now and, in the team’s view, that means buying equities.

The problem that cautious investors face today is that they may have to accept a considerable amount of volatility if they are going to genuinely succeed in protecting their savings.

The US economy is the one relative bright spot among developed markets, and investors are now increasingly prepared to pay higher prices for businesses that offer more predictable earnings in a most uncertain world.

The Jupiter Merlin portfolios are aligned to benefit from the successful growth of strong, healthy companies, and where the portfolios hold bonds, we are careful to own only those that have a positive risk/return profile.