Week ending 11 September 2009

Throughout the year a lot has been written about ‘once in a lifetime opportunities in a number of asset classes. These range from emerging market and small cap equities, through corporate and high yield bonds to unconventional asset classes such as UK commercial property, gold and even natural gas, copper and coffee. Many of these (absolute and relative) valuation gaps have narrowed significantly since risky assets started to rally early in March this year, as these opportunities were readily available and more importantly easily recognisable in the market. Since then (around half a year ago, and measured in US Dollars) emerging market equities are up by around 87% (against developed markets’ 65%), US corporate bonds have rallied 20% (US government bonds 0.2%) and UK property securities are up almost 150% (against global property securities which have doubled in the same time).

At face value these performance numbers look quite impressive and one may be forgiven for wondering why multi-asset portfolios have n performed to the same extraordinary extent. An important factor that one needs to take into account is that few investment professionals will claim that they can time the market, and even fewer would have thrown in the kitchen sink after risky assets when markets turned on 9 March 2009. Assuming that an investor entered the market two weeks into the rally (and that was seen as quite a leap of faith at the time) returns of the asset classes mentioned above would have been somewhat muted. Emerging market equities delivered around 57% from 23 March to date, US corporate bonds added 18% and UK property securities were up just over 80%. A second factor is that diversification of risk also leads to diversification of returns. Insurance in the form of government bonds and gold have not performed in line with the risky assets mentioned above, but under a couple of bleaker “what-if” scenarios they would have stood investors in very good stead if markets headed south again.

Source: RMB Asset Management / Bloomberg / Lipper Hindsight. September 2009.

One asset class that still looks interesting, not only from a valuation point of view but also from its historical performance and defensive properties following a market downturn, is high yield corporate bonds. The graph alongside compares the performance of US equities to US high yields bonds since the late eighties, and it seems as if this asset class (which has yielded nearly 45% since the turn in markets) could continue to add value to diversified portfolios.

During the week equity markets were quite strong with the MSCI World returning a little over 4%. Property securities strengthened across the globe, and as has become customary during a rally in risky assets the US Dollar lost ground against most other major currencies. Bonds held up well in spite of the solid performance in equity markets with the yield in the benchmark US 10 year treasury shedding 10 basis points (from 3.44% to 3.34%) during the week.

Returns to 11 September

Source: RMB Asset Management / Bloomberg / Lipper Hindsight. September 2009.

Important Notes

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Wealth Management Group 2009