Over the last week both Switzerland and Denmark announced further cuts to their already negative interest rates.
US$7.3 trillion of government debt in the Eurozone, Switzerland and Japan has a negative yield. It used to be that when you lent someone money, even the government, you received interest. Apparently not any more.
For those investors that are still lending, or considering lending to governments, globally 52% of all government bonds currently yield less than 1%. Australian 10 year bonds are yielding significantly more than that at 2.6%, but even this is at an all-time low.
Not so long ago, a primary source of concern was inflation. Now it's deflation.
According to Merrill's 83% of global equity market capitalisation is underpinned (or should that be propped up?) by zero interest rate policies. Given that many pension funds around the world are limited, or not permitted to invest in equity markets due to the risk, they are between a rock and a hard place when it comes to asset allocation.
Of course this can't last forever. Eventually interest rates will rise. Given that bond markets are many, many times larger than equity markets, any shift from equities (and their stretched valuations) to bonds to chase yields is likely to be painful.
The issue is when? At present while the music is playing investors will have to keep dancing, but the issue is how long can the current environment last?
Probably sometime considerable time yet, but we do believe that there will, as they say, be tears before bedtime when it changes.
It will take people far, far smarter than yours truly to answer that, and for one fund manager's view on this and other topics watch this interview we recorded earlier this week with Morphic Asset Management's Jack Lowenstein.
Meanwhile if you haven't yet registered for our AFM/Deloitte lunchtime presentation "Looking Forward, Looking Back" to be held in Sydney on Thursday 12 February, please click here.
Specific results received this week include the following PERFORMANCE UPDATES:
Monash Absolute Investment Fund returned 0.80% during December bringing the 2014 return to 5.40% (ASX 200 Accum 5.61%) and a volatility of 8.10% (Index 10.95%).
The Aurora Fortitude Absolute Return Fund returned -0.74% during December with a volatility of 1.23%.
Optimal Australia Absolute Trust returned -1.53% in December, resulting in a 2014 annual return of 3.24% and volatility of 2.80%.
The Laminar Credit Opportunities Fund returned 0.64% over the month of December and has annual volatility of 0.63%.
Pengana Australian Equities Market Neutral Fund returned -3.90% during December.
The Totus Alpha Fund -2.30% during December bringing year to date return for 2014 to 12.85% with volatility of 9.14%.
FUND REVIEWS released this week, all with the potential for earning CPD points:
Aurora Fortitude Absolute Return Fund; Monash Absolute Investment Fund; Morphic Global Opportunities Fund; Bennelong Alpha 200 Fund
We have limited places available for our Deloitte "Looking Forward, Looking Back" lunchtime seminar on Thursday 12 February in Sydney. We'll have four of the best and brightest fund managers on hand, including Simon Shields, George Colman, John Corr and Monik Kotetcha to give you the benefit of their opinion. If you would like to attend, please register your interest here.
18 February 2015 in Sydney - Efficiency in a Regulated World
25-27 March 2015 - Digital Marketing for Banking and Financial Services Summit
Finally, and now for something completely different - on the eve of the Australia Day long week-end we hope you have a great day on Monday.
Kind regards,
Chris
CEO, AUSTRALIAN FUND MONITORS
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