25
20
15
% 10
5
0
CONTRARIAN RISK ASSETS
Risk assets
Top 3 performing IMA sectors – 3 years
%
120
90
60
30
0
Technology echnology h l
& telecoms
-30
Dec ’08 Jun ’09 Dec
Source: Morningstar
-5
Dec ’10 Feb ’11 Apr
Source: Morningstar
UK smaller companies
North American smaller cos
Jun ’10
UK gilts ilt
Jun
Dec
Index-linked gilts
Aug
Jun ’11
Top 3 performing IMA sectors – 1 year
Corporate bonds
Best- and worst-performing IMA sectors
3mths 6mths 1yr 3yrs 5yrs 10yrs
Corporate Bond -0.27 -0.78 3.33 9.23 2.62 3.4
Nth America small cos 1.84 -10.38 -1.97 17.87 5.83 3.67
Tech & telecoms 2.06 -7.32 0.64 21.45 6.79 0.56
UK gilts 8.18 13.19 15.8 8.11 6.34 4.85
UK index-linked gilts 11.19 16.38 23.5 14.61 8.38 7.18
UK smaller cos
Source: Morningstar
-3.92 -13.71 -1.75 22.44 1.26 6.34
Oct
Dec
Dec
The price is right
2012 will continue to be volatile and valuations
will continue to look cheap, so contrarian investors
willing to put their risk budget in play should be able
to take advantage of the mis-pricing of assets across
the various classes
BY GAVIN HAYNES,
MANAGING DIRECTOR,
WHITECHURCH SECURITIES
There is no doubt that the
current turbulence is resulting
in a very high level
of aversion to taking risk,
which in turn appears to
be leading to a serious mispricing
of investments. For
anyone following a contrarian
investment philosophy,
then buying risk assets
would appear to be high
on the agenda for 2012.
It seems inevitable this
year that the number of
‘known unknowns’ will
remain high, and high
levels of volatility could
be a feature of investing
for some time to come.
Attempting to position a
portfolio based on the
short-term, politically-driven
climate is little more
than a guessing game.
But looking at traditional
valuation measures to
assess which asset classes
are cheap does provide
a more reliable way to
position an investment
portfolio. In doing this, I
see 2012 throwing up a
number of enticing opportunities
across asset classes,
where investors will be
rewarded for taking risk.
At the same time, however,
I am cautious of traditional
low-risk safe havens.
l Gilts a safe haven?
The flight to safety during
the recent economic turbulence
has seen investors
flee for cover, selling risk
assets in favour of safe
havens such as UK and
US government bonds. But
this huge demand has led
to these investments offering
extremely unappealing
returns. Gilt demand has
risen to the extent that
investors are prepared to
accept just over a 2% yield
on ten-year gilts.
While the chance of
default remains extremely
low from holding UK government
bonds, these low
yields seem unsustainable
unless you believe we are
in for a long-term deflationary
environment. I do
not, and believe that gilts
could be an area that is
significantly overvalued as
negative sentiment has distorted
valuations.
At present, the 2% yield
on ten-year gilts is actually
-3% once inflation is taken
into account. This does not
equate to a low-risk investment
strategy. Even if inflation
falls to 2%, then there
is no real return.
I do not believe in the
notion of buying an asset
because it has provided
safety in the past, rather
the starting valuation is
much more important. I
would argue that actuaryled
asset allocation models
that look backwards and
state low-risk portfolios
must have a significant
amount of gilts could be
fundamentally flawed.
l Corporates vs gilts?
What the flight to safety in
recent months has done
has seen the difference
between yields on gilts and
corporate bonds increase
considerably. As in 2009,
there are now more compelling
opportunities available
in corporate bonds –
both investment grade and
high yield – with yields
that more than compensate
investors for the perceived
extra risk of lending to
companies. In fact many
multinationals have balance
sheets that appear
much stronger than many
large Western economies.
Companies have significantly
deleveraged from
2008 and corporate balance
sheets across many
sectors are in rude health.
There is no point in
taking risk for risk’s sake.
From a sector point of
view, I favour bond fund
managers who are not
34 PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2012
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