The past few weeks have been a chastening experience for many in financial services, as the spread of the coronavirus continues to wreak havoc on global markets.
It is more than a decade since markets have seen such a sell-off, with global equities currently down more than 25 per cent.
In fact, it is probably the first time for many investors – and even some financial advisers and fund managers – that they have witnessed such an unforgiving investment climate, with so much uncertainty and volatility.
In hindsight, it is interesting to consider how quickly the world has changed.
In January 2020, many of us were looking to find pockets of value in a late-cycle investment world, having seen most global markets record strong, double-digit returns in 2019.
- Global equities have fallen 25 per cent
- Government bonds have done best in the current scenario
- Multi-asset funds have held up well
Fast forward a couple of months and we all seem to be running for cover, as we look for signs this pandemic is coming to an end.
Bonds have been the natural safe haven in this sell-off, with the asset class comprising six of the top 12 best-performing Investment Association sectors between February 20 and March 23 2020.
Government bonds tend to do best in this scenario, even when yields are expensive to start with – which they were.
It does not mean they cannot get more expensive, as people flock to safe havens and that is what the IA UK Gilts sector has been.
The only other sectors with any form of positive returns have been cash.
One thing we have to consider in this period is that sterling has depreciated to even lower levels, and when the pound falls, it is good for your overseas holdings, such as global bonds – provided they are not hedged back to sterling.
Many of the best-performing global bonds are government bonds, such as the MFS Meridian US Government Bond (14.1 per cent), the iShares Overseas Government Bond index fund (12.8 per cent) and the Vanguard Japan Government Bond index fund (11.6 per cent).
Debt funds in the very short duration segment do not see much volatility in their returns on account of the short maturity of the papers they hold.
Seven of the top 10 performers in the IA Corporate Bond sector during the downturn are also short-duration vehicles, boosting performance in this sector.
They include the ASI Short Dated Sterling Corporate Bond Tracker (-2.7 per cent), the EdenTree Amity Short Dated Bond (-2.8 per cent) and the AXA Sterling Credit Short Duration Bond (-3.4 per cent).
With global markets down 25 per cent – and UK equities down more than 30 per cent – the fact that the average fund in the IA Targeted Absolute Return sector is down 8 per cent is reasonably good.
But what we have learned in the past is that there is significant dispersion in this sector, given it is anything but like-for-like.
For starters, there are long-only, long/short, UK-centric, global, fixed interest, and numerous other types of funds all mixed together in the peer group.