Boring bonds vs. Volatile equities
Australia seems to be a bit player in a wildly fluctuating equity market, with daily swings in either direction of between 2 and 4%, or if you're in China, double that. What's been more difficult to fathom are the intraday swings on the Dow of 400 points - or up to 2% on the day.
It is hard to work out what is really driving the market's volatility, but it certainly seems sound logic is not. There may be an element of buying the dips, and with high yielding stocks such as Commonwealth Bank off around 20% that might not be surprising. However the more likely answer is a combination of a lack of liquidity, a surplus of fear, combined with quant/ETF trading and traders moving the market while having to negotiate the mayhem.
What is amazing is how quickly markets have become disorderly, and how quickly equity investors have come around to understanding that while equities might take up the majority of the financial media, they're not always orderly.
This week Hedge Clippings met with Charlie Jamieson and Angus Coote of (the appropriately named) Jamieson Coote Bonds, who reminded us of the Economics 1.01 lesson that bonds remain a cornerstone asset class in both European and US markets, provide stable income plus return of principle if held to maturity, plus some potential for capital gains (or losses) if realised before their stated maturity.
One problem for Australian investors is that there's minimal understanding of these low risk "boring" fixed income and bond markets and how they operate. Globally the bond market is many, many times larger, and in many ways far more influential, than the equity market. Another is that there has been much negative press around fixed income and bonds in the face of rising US interest rates. In spite of this bond returns remain positive, and with low volatility. In fact last Monday and Tuesday bond prices rose significantly as equities suffered substantial losses.
Are bonds without risk? Of course not, as investors in Greek Government Bonds would no doubt agree. However, like any market, different security selection comes with differing risk profiles of credit quality and liquidity dynamics. However bonds can generate a significant counter weight to equity portfolios, bringing low volatility and excellent liquidity from high quality issuers such as Governments or highly rated corporates. In fact the 10 year Australian Government bond (often referred to as the risk free rate) returned over 15% in 2014 from a combination of capital appreciation plus paid interest income.
Last week Hedge Clippings advised that August would become a critical test for many equity investors and managers. Evidence to date is that while many have performed well in protecting investors' capital, others will have failed the test. We await the final returns with interest. However for investors not prepared to accept the current levels of market volatility, a dose of boring bonds might just be the answer.
Bonds: Stirred maybe, but not shaking!
Specific results received this week include the following PERFORMANCE UPDATES:
FUND REVIEWS released this week: Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; Aurora Fortitude Absolute Return Fund
26 - 28 August 2015 - The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.
17 September 2015 - The 14th Annual Hedge Fund Rock and Australian Hedge Fund Awards 2015 as the industry lets its hair down with some drinks, music and great videos. All proceeds go to Redkite helping childern with cancer and their families.
And Now for Something Completely Different: I try to avoid parking fines - sadly with limited sucess. But when I do get them I usually find it easier to pay them than spend the time and frustration of fighting the bureacrats. Not this fellow...
On that note, have a good week-end.
Regards,
Chris
CEO, AUSTRALIAN FUND MONITORS
Connect with me on LinkedIn Twitter Facebook
|
Registration to AFM is free and provides general information and performance data on Absolute Return, Hedge Funds and Alternative Investments. |
Fund Managers and paid Subscribers have access to details on Individual Managers and Funds, with historical results, key performance indicators, latest news and performance reports. |
Prism Select provides self-directed investors and their advisors with factual information, performance data and opportunity to apply for funds online using OLIVIA123. |
Tune into Sky Business on Foxtel every week on Monday at 2:15pm for AFM's weekly comment. |
