My midriff has become a little more portly in recent years. The temples are greyer, my demeanour curmudgeonly and the car radio is set to Radio Four rather than DLT. But middle age also has its advantages, and there is little substitute for the experience of having been given a good kicking by the markets while acne was still in situ.
I started my investment career in the summer of 1986. Freshly laundered, spotty and naïve, a generation of us thought that markets were a one-way bet. This was the life. Clients gave us money to look after, we invested it and everyone made a mint. As an insurance-selling meerkat might say: Simples.
In July 1987 the eminent and newly integrated investment bank BZW published its monthly commentary calling the top to the market. The Federal Reserve was raising interest rates and the party was over, so they argued. My, how we laughed. What did they know? Well, October that year told us exactly what they knew.
The current bull market is showing its age. In March it will notch up its eighth anniversary. There is a new generation that has only ever worked in this bull market. To a significant proportion of those who make up ‘the market’, there has only ever been quantitative easing (QE) and rising asset prices. As I write, the S&P 500 index is marching towards its 90th consecutive trading day without a 1 per cent fall; the last time we saw this was 2006.
If we are right in thinking that the world is moving into a new post-QE phase of higher inflation, higher bond yields and rising short rates, then we are in the classic vestiges of a bull market. This is the trickiest of the lot. The gains are usually the best, but end in the worst pain. The adage for times like this is to enjoy the party, but dance close to the door.
What this means in practice is to move equity weights further towards the lower echelons of their allowable ranges. Bond exposure should be short duration. Our hiding places include those absolute return funds that actually deliver on their promises, defensive structured products, infrastructure, a sprinkling of some of the excellent specialist bond funds, plus a number of the high-yielding Reits that have more recently come to the market.
NB Global Floating Rate Income is a nice example of what we look for. Crucially for us it offers protection against rising interest rates. The vast majority of the portfolio is invested in sub-investment-grade, senior secured corporate loans denominated in US dollars. The interest rates payable on these loans are linked to short-term US Libor rates. At the end of 2016, some 85 per cent of loans in the portfolio had a floor of 0.75 or 1 per cent – with US rates now having risen through these levels we should see the portfolio’s yield float freely, with investors benefiting from further rises in US interest rates.
Similarly, another favourite is Civitas Social Housing, a UK Reit, which buys properties from housing associations and local authorities. Civitas then leases (for 10 to 40 years) homes back to the housing association or local authority, which will continue to manage the home. All rents are RPI-linked and quasi government-backed, and investors will therefore benefit from rising inflation.