Who would be an asset allocator? Say on 1 January 2011 there had been a Great Superpowers Giveaway and, delayed by a client, you arrived too late for all the cool stuff like invisibility, fl ight and x-ray vision though still in time to bag the gift of perfect macro-economic foresight – how would that have helped you?
You would, for example, have known emerging markets would potter along reasonably well – at least given the circumstances – while the eurozone’s train crash would edge the UK and the rest of Europe towards recession. On 2 January, therefore, you would have positioned your equity portfolios accordingly and, come December, you would have been cursing that late-running client. For their part, bonds behaved even more perversely. Again, back in January 2011, it was patently clear sovereign debt was wildly over-expensive and only heading in one direction – an analysis that turned out to be sort of half-right. If you were not at least partly exposed to gilts by the second half of the year, presumably that tardy client would have needed a bodyguard.
Rethinking risk
Chairing a roadshow at the start of last year, the question was put as to whether UK equities or gilts carried more risk and I was by no means alone in smirking at the obviousness of the answer. I suppose at the time we were all technically right that technically UK equities technically carried less risk than gilts. It is just that technically the market did not care. Employing the age-old investment strategy of Fear/Greed under its sophisticated new name of Risk-on/Risk-off , the market decided certain government bonds were good, equities and most other assets were bad and valuation was an irrelevance. You have heard of ‘growth at any price’ but this was ‘certainty and reassurance at any price’ and, no, I do not expect the acronym will catch on either. As a result, we have reached the stage where it is patently clear sovereign debt is wildly over-expensive and only heading in one direction and… ah. As Jupiter boss Edward Bonham-Carter observed recently, while many investors would characterise themselves as ‘cautiously optimistic’, in practice that means more ‘cautious’ than ‘optimistic’ and now their portfolios are perfectly positioned for 2011.
Bond bubble
The last time I asked a fund manager about the chances of a bond bubble, I provoked what sounded uncomfortably close to a snort. He later relented to extend his answer to point out that, since the global bond market dwarfs its equity equivalent, the whim of the UK investor was unlikely to have much eff ect but I’m still scarred. Nevertheless, while unlikely to make that mistake again, there must at least exist some sort of fi xed income equivalent of bigger fool theory. As such, when the next bout of risk-off kicks in, a re-evaluation of what actually constitutes risk may be in order – that, and perhaps turning up to the next Great Superpowers Giveaway in plenty of time to bag the gift of perfect market foresight.
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