The decoupling of the negative correlation between equities and bonds over the past two months has m...
The decoupling of the negative correlation between equities and bonds over the past two months has made asset allocation more problematic.
Asset allocators might typically take profits from one asset class, after it has posted strong growth and looks potentially overvalued, and rotate into the other. But with both equities and fixed interest heading in the same direction of late, that task has been made all the more difficult.
David Hambidge, fund of funds manager at Premier Asset Management, says: 'It has been a very strange year with equities and bonds pretty much moving in the same direction. It is difficult switching if both are positively correlated.'
After the recent sharp bounce in the equity markets, Hambidge says he was keen to take profits, particularly from the UK and Europe, but the bond market, the natural home for such an asset allocation change, is looking less attractive after its recent run.
'We made a good call in Europe in March and got a big post-Baghdad bounce. We took profits a month or so later and put the money into Asia on the news Sars was coming under control. Asia had missed the Baghdad bounce because of Sars and although it has not taken off yet, it has performed well,' Hambidge says.
'We are still overweight UK equities and you cannot help but be nervous now the market has risen from 3,300 to 4,200 and there has to be a temptation to take profits. Normally fixed interest would be the obvious home for the money, but the asset class is having a similar rally. So switching has to be between different markets and our turnover has dropped because of that.'
Richard Philbin, fund of funds manager at Isis Asset Management, has been selling down his exposure to smaller companies funds and investing the proceeds into more mainstream UK equity income portfolios.
'Selling out of a host of smaller company funds in the Far East, US and Europe and dumping the fund's technology weighting in favour of a significant slice of equity income have helped the performance of our multi-manager funds,' Philbin says. This move, along with concentrated weightings in fixed interest funds, has reduced the volatility of the portfolio, Philbin notes, and given him greater latitude to invest strongly, like Hambidge, in Far Eastern equities.
'Up until then the fund had been taking on significant volatility through its exposure to markets like the Far East but the risks were not being rewarded. This though has now been revisited with the fund now once again overweight in the Far East,' Philbin adds.
Philbin's recent concerns about fixed interest are echoed by Hambidge.
Although the asset class continues to perform strongly with markets underpinned by low interest rates, which are applying downward pressure on yields, Hambidge believes the asset class is not as defensive as it has been in recent years.
'There is a danger we see a stronger than anticipated economic recovery. The potential downside in bonds has increased and they may not be that defensive,' Hambidge notes.
He feels there are better opportunities in high yield bonds and his weightings in the asset class since last summer have been a strong performer for the fund.
Strong performance from equities recently.
Asia has strong growth potential.
Bond yields continuing to fall.
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