DIY InvestorMagazine
/
March2014
18
JAMES BAXTER
MANAGING PARTNERTIDEWAY
INVESTMENT PARTNERS
BONDSVS EQUITIES IN 2014
The impact of easymonetary policy in the post crisis
recovery is now obvious to see. With base interests
rates in the developed world economies at below
1% for 7 years and the time horizon for rate rises
perpetually 18months off, everything looks expensive.
•
Income generating assets have been pushed to very
high valuations, the higher the certainty of the
income the higher the price: gilts, corporate bonds,
London property, high yield equities all at or fast
approaching generationally high relative valuations.
•
The price volatility of non-income producing assets
is also high as highly liquid investors with negative
cost of financing (after accounting for inflation)
pursue inflation beating returns.
WHEREDOES THIS LEAVE
THEBONDVERSUS EQUITY
DEBATE?
The case against bonds is well versed. With interest
rates forecast to rise bonds will fall and should
therefore be avoided. Similarly the case for equities
GETTINGTHEBEST FROMBONDS
Here aremy top 5 tips:
•
Consider buying individual bonds not just funds.
Only when you hold a bond directly do you get the
certainty of the return tomaturity.
•
Keep costs low. This means using a good broker with
low fixed fees and good execution in the bondmarket.
•
Optimise returns buy selling ahead of maturity.
With persisting low rates bonds will generate non-
linear returns. Paying investors disproportionately
high returns ahead of the yield tomaturity in the
early years and less in the last few years. If this is
news to you, probably have not thought about bond
investing andmight be better referring you
client to a fund or bond expert.
•
Avoid gilt funds, vanilla corporate bond funds and
short dated bond funds. After fees the likely return
on all of these, from here until interest rates have
normalised, is likely to be low and less than inflation.
Use funds that can access the higher yieldmarket,
the new issuemarket where rates will track up
if interest rates rise and that can hedge against
rate rises.
James Baxter is aManaging Partner at Tideway
Investment Partners who as well as being specialist
‘at retirement’ pensions advisers run the award winning
Tideway UCITS - Global Navigator absolute return
bond fund.
as a protection against inflation is the general view.
If inflation is coming buy equities not bonds. The
principles in both these statements are correct but the
resultant strategy looks dangerous. With the S&P 500
index, themain barometer for global equities, up 150%
in five years, put all your money in equities? History
would suggest this might be a pretty dumbmove.
THE PRICEOFCERTAINTY
It remains extremely difficult to forecast if and when
inflation will start to rise, when interest rates might
rise, what will happen to corporate profits, investor risk
appetite and whether this 5 year bull market in equities
can continue without amajor market correction at some
point soon. So before going ‘all in’ with equities wemust
admit we know very little as to what equity returns will
be and that the only route to a certain return is in bonds.
How important is certainty to you? Howwill you feel if
you are nursing big losses?
