Time to take stock of events

The end of the year is a useful time for investors to take stock of which asset classes delivered returns and whether the investment case has changed.

John Husselbee, head of multi-asset at Liontrust, says: “Asset prices have continued to be effectively underwritten by central banks which has meant that, property aside, you would have been satisfied invested in most asset classes. This is particularly true if you were holding international assets due to sterling devaluation, the impact of which has dominated returns.

“Possibly reflecting the significant geopolitical uncertainties we saw, investors were attracted to asset classes with safe haven status in 2016, generating inflows to fixed income and money market funds at the expense of equities and – particularly in the immediate aftermath of the Brexit vote – property.”

But with many perceived safe haven assets now looking expensive, he acknowledges this may affect the extent to which they can continue to provide downside protection and portfolio diversification.

“Bonds’ diversification benefits still justify some allocation in a balanced portfolio, but we favour being significantly underweight,” Mr Husselbee explains. “Investors now have to look to other means of generating income and low-volatility returns, with the options including real estate, long/short equity strategies and strategic bond funds.”

For Valentijn van Nieuwenhuijzen, chief strategist and head of multi-asset at NN Investment Partners, government bonds and other types of yield plays in equity and fixed income markets were the recipients of the majority of inflows this year.

“Within equity markets this translated into cash flowing into sectors and stocks that had a defensive profile and attractive dividend yield – such as low-volatility stocks, consumer staples, utilities and telcos,” he says. “In fixed income spread markets it was especially emerging market debt and corporate bonds – both investment grade and high yield – that were popular.”

But he observes a shift in investment themes in recent months, a trend that accelerated in the aftermath of the US election.

“Therefore, it can now be said that an investment in equities was a better investment than government bonds in 2016,” he concludes.

Property had been a hugely popular asset class heading into 2016 but in the wake of the surprise outcome of the EU referendum, open-ended property funds ran into trouble as investors tried to pull their money from the vehicles. This  prompted many well-known asset managers to pause trading in their property funds.

Nick Peters, Fidelity International’s multi-asset portfolio manager, notes: “Property is vulnerable in a rate-rising environment and yields could head higher from here. 

“There are opportunities in physical property and it remains a good asset class for income. But investors need to be comfortable with the liquidity issues around the asset class, which became all too apparent for many UK property funds post-Brexit [vote].”

In this now highly volatile environment, investors may be tempted to stay on the sidelines in cash but they could be missing out on investment opportunities created by the prevailing uncertainty. 

Andrzej Pioch, co-manager of the multi-index fund range at Legal & General Investment Management, says this year many investors decided to hold a significant portion of their assets in cash to manage that volatility.

But he points out: “While cautious on equities, we do not discount risk assets altogether. Market volatility creates opportunities to identify pots of value, and we currently favour mid-risk assets such as global Reits and emerging market hard currency bonds.”

If 2016 has been tricky for investors, then 2017 may test nerves even more. Mr van Nieuwenhuijzen urges investors “not to fall into the behavioural pitfalls that all these emotions in politics, headlines and markets create” and remain exposed to multiple return sources.

Ellie Duncan is deputy features editor at Investment Adviser