Large companies come to the fore after market gains

Gary Potter, co-head of multi-manager at F&C Investments, explains: “Coming into this year markets were in a jubilant mood having had a very strong 2013, and actually these past five years have been one of the best five years on record in terms of investment performance.”

Unsurprisingly, bonds have suffered during the rise of equities, while the emerging market sell-off in the second half of 2013 signalled the start of an unexpected trend where developed markets were outperforming emerging markets.

Mr Potter adds: “The economic outlook, certainly in the US and UK, looks reasonable, while Japan, from an earnings point of view, looks like a reasonable one.

“Over the year some of those positives will reassert themselves and we should have a reasonable, but not dramatic year. After two and a half years of very handsome gains in markets, it is quite likely this year will be disappointing in terms of total return.”

Tony Lanning, fund manager for the JPMorgan Fusion Funds range, notes the exceptional year for western markets “will not be repeated”. That said, he suggests that in spite of setbacks in some markets such as Japan, there are still opportunities to add to positions at attractive valuations.

“Within equities, our preferred markets are Japan and Europe. In Japan, we believe in the recovery story, although with the caveat that lengthy structural reform may test the faith of investors who are understandably sceptical,” he explains.

“In Europe, we acknowledge that [it is] likely the easy money has been made, but opportunities remain. Now the story in Europe is all about growth. Since the middle of last year we’ve begun to see significant economic expansion following a long period of contraction.”

Another developing trend in recent weeks has been the rotation from small- and mid-cap stocks towards larger, more defensive holdings.

Peter Fitzgerald, head of multi-assets at Aviva Investors, notes: “What you have seen within markets is significant turmoil within sectors and in particular within small and mid caps.”

The manager suggests active managers across the UK and Europe in particular will have underperformed in the past few months as many traditionally gain alpha from overweight positions in mid caps.

“That [rotation] started around the middle of March, and you’ve seen that happen in the UK, the US and also in Europe. So what you’ve seen is some of the managers with a larger, more defensive tilt in the UK with a bias to large-cap businesses have certainly done better than those with a bias to small and mid caps.”

On the fixed income side, the trend has mainly been towards high-yield debt, although the preference among multi-managers remains equities over bonds.

Mr Lanning acknowledges that to a certain extent the easy money has been made in high yield, but adds that the hunt for yield in the marketplace remains paramount.

“The coupons available in high yield combined with the low default rate means that investors are well compensated for risks and the yields remain attractive when compared to cash. That said, we would point out that liquidity may pose a headwind at some point.”

Mr Potter is also wary of the potential headwinds for this sector, as he suggests: “In this big chase for yield people have blindly bought high yield and junk bonds to get income without taking on board the risks those sectors necessarily command.”