Bond prices fall (and long-term interest rates start to rise)Now that government bonds have been falling for a number of months (with bond yields rising inversely to the falling price), as global economic growth prospects have steadily improved, and also as investors grow increasingly nervous of any change in monetary policy from the US Federal Reserve, potentially slowing the rate at which they currently buy US government bonds (under their Quantitative Easing program) from the US government.
|1. Euro, US government bonds have lost over 5% since April this year|
US investors take note, respond by pulling money out of bond funds
US retail investors have responded to this expectation of slight change in US Fed policy by selling bond funds in size.
|2. Finally, retail investors start to sell bond funds|
Interestingly, the same retail investors have tended to put money into equity funds, chasing the upwards momentum in US and foreign stock markets.
|3. But they continue to put money into equity funds|
As economist Ed Yardeni comments:
"over the past 13 weeks through the week of August 28, the Investment Company Institute estimates that bond funds had net cash outflows totaling $438 billion at an annual rate. Over the same period, equity funds had net cash inflows of $92 billion at an annual rate. I wouldn’t describe that as a “Great Rotation” just yet, but it could be the start of a big swing by retail investors into equities."
What does my Multi-Asset Trending System (MATS) have to say?
My proprietary multi-asset trending system, that chooses between equities, bonds and cash once per month in a number of different regions, is invested 60% in equities (UK small-caps, Euro low volatility, Japanese currency hedged shares) and 40% in cash. Note: 0% is invested this month in government bonds, highlighting the poor trend in bond market performance over the past few months.
Why listen to this systematic (i.e. the asset classes are chosen using a simple mathematical model rather than by yours truly!) investment approach? Because it has gained over 15% net of trading costs in the year to date, that's why!
The Main Risk: That there is more to come out of bonds, into equities
Judging by ETF flows over 2013 to date, the risk is that this reversal in flows in bonds funds could turn from a trickle into a flood: looking at global bond (fixed income) Exchange-Traded Fund (ETF) flows, this year to date has still been positive to the tune of nearly $19bn, on top of strong positive inflows over 2010-2012.
|Source: BlackRock4. Bond ETF flows have been strongly positive since 2010. |
Conclusion: Equity Income Funds look set to attract bond refugees
We can see from the following chart that UK investors have also been putting greater amounts of cash into equity unit trusts this year, while flows into bond funds have been, in contrast, stagnant.
|5. UK retail investors putting increasing amounts into equities too...|
|6. UK Dividend Aristocrats ETF surges upwards|
If you want to be more sporty with your investment, then I would look at a portfolio of UK mid-cap and small-cap companies that have not only raised their dividend consistently over the past few years, but that offer a decent dividend yield (over 3%, thus much better than government bonds or cash rates) combined with strong price momentum.
You might want to look at: Sports Direct (SPD), Tribal Group (TRB), Chesnara (CSN), Aviva (AV), James Latham (LTHM) and ICAP (IAP) as good examples of stocks that fit this description.
Good luck with your investments,