Friday, 15 March 2013

The Great Rotation and the Hunt for Yield

This is something you may have been hearing more and more, as concerns with the historically low bond yields spread.

Over the past few years especially you would have been well placed to hold bonds, Gilts especially would have returned you a healthy 25% since 2010.  Since the credit crisis in 2008, bonds have been steadily rising as investors sought safe haven returns.  The significant up lift in prices be it Government Bonds, High Yield or Investment Grade debt has caused the income you receive drop drastically.  On a 10 year Gilt today, you would only receive an annual income of 1.89%!

The hunt for yield is on, with cash producing next to nothing and bonds going that way, where can you turn for income?

Two major yielding asset classes remaining are property and equities.  The lower risk alternative, property has been having a varied time depending on your geographical location.  

The U.S has seen a drastic improvement in their property market as prices rise the most since 2008.  This however is not the case in the U.K,  outside of London values have been hard pushed to stay level as demand for high street and commercial property wanes.  This capital erosion weighs on the income received and over the past year has produced poor returns.

Finally we are left with equities. During January, inflows into equity mutual funds rocketed to record levels, as many investors who were sitting on the sideline with their cash moved into the market.  

For those focusing on yield, the equity income funds available generally will provide an income of 3 to 5%, and some even higher!  In this current market, you would be hard pressed to find better in alternative asset classes.  

It is no doubt that people have been putting their cash into equities, but the real test is when people start moving out of bonds.  Asset managers have started to see out flows from bond funds in favour of alternatives and this could be the start of things to come.