For some, that means balancing exposure between equities and bonds, while others will include alternative asset classes to improve diversification and returns.
Assessing the performance of the various asset classes in 2012, and so far in 2013, can indicate where the smart money should be invested for the rest of the year.
Generally, 2012 was a good year for markets, with risk assets performing particularly well and volatility declining overall for most asset classes.
According to the Barclays Equity Gilt study, equities were up 12.9 per cent for the year, while bonds were up 0.4 per cent. Real estate posted positive returns, while commodities proved a mixed bag, with cotton and natural gas up 25 per cent, but sugar and wheat remaining flat. Gold, too, fell out of favour in a more risk-on environment.
However, although a perception of volatility remained, data shows it trending below 10-year averages. As Frances Hudson, global thematic strategist at Standard Life Investments, explains: “The equity risk measures VIX and VDAX spiked in early June, around the time of the Greek election, at 26.7 and 31.8 respectively, and averaged 17.8 and 20.7, ending the year at 18.02 and 16.05 respectively. The MOVE measure of bond volatility averaged 69.9, with a peak of 95.4 in mid June, ending the year at 59.4.”
In many respects, 2012 was a year of two halves: uncertainty in the first half of the year was quelled in the summer when the ECB suggested a solution would be found to the eurozone crisis and countries would not be allowed to fail. This suppressed some of the main fears in the market, fuelling appetite for risk assets but limiting the prospects for government bonds.
“The main issues that face bonds are quantitative easing and the fact it is not likely bond rates can fall a vast amount further than today,” says Edward Allen, partner and portfolio manager at Thurleigh Investment Managers. “With the US performing slightly better in terms of GDP growth and company performance, people are starting to consider when governments might start to think about putting interest rates up again. At that point, bond positions become unattractive.”
Outside equities and bonds, cash was among the poorest performers and continues to be unattractive as it offers a negative return in real terms. Commercial property eked out a low level of return over the course of the year, but demonstrated the need for skilled tactical selection.
In terms of the outlook for this year, a storming start for equities, up roughly 10 per cent in the first quarter, suggests a continuation of a higher appetite for risk. While bonds will continue to be attractive for investors who favour their longer-term characteristics, it is likely investors will have to move up the risk scale to secure the same levels of returns they have enjoyed to date.
Laura Mossman is a freelance journalist
