Slaves to fashion might pay the price
The recent flood of fixed interest and corporate bond fund advertisements urging the general public to buy into the bonds market has all of the feel of the late technology boom. Investors are lured with amazing historic returns, without reference to what the future may have in store. It is understandable that after three years of negative equity returns, the prospect of buying into a regular income producing asset has its attractions.
Wary of figures
There can be little doubt that for many investors, particularly those looking for income, fixed interest funds should form a significant part of their overall portfolio. But investors looking for longer-term capital growth should be wary of relying on performance figures from the past three, five or 10 years.
Towards the end of the 1980s, when the Japanese economy was showing its first signs of stalling, private investors continued to invest their assets in newly launched unit trusts. Those unfortunate enough to have remained invested in some of the worst performing funds will still be nursing losses more than 10 years later.
Bursting bubble
In more recent years, the growth in technology funds at the end of the 1990s prompted a rush for investment houses to launch their own, just as the bubble was at the point of bursting. Now, as equity markets across the world have fallen over recent years, demand for fixed interest has taken pole position.
Investors should be wary. The past 20 years have seen a dramatic secular decline in both inflation and long-term interest rates. This has led to a virtuous cycle of capital gains from bonds, coupled with regular fixed income coupons to give spectacular total returns. The question investors should ponder is just how long this trend can last?
History is littered with examples of investors being drawn into new funds launched off the back of good past performance in specific sectors.
It will be interesting to see how many advisers are caught out shutting the stable door after the horse has bolted.
Christine Ross is head of financial planning at SG Hambros
