Break the circle of equities denial

THERE'S a recurring theme in all the hot air surrounding investment and markets that fascinates me.

It is the doctrine that tells us we should always be invested in equities because, over the longer term, they outperform every other asset class. To even propose any alternative course of action is to invite ridicule. Given the continuing precariousness of the global economy, I seriously wonder if this traditional thinking is leading us all to a disappointing conclusion.

First, it may surprise many to learn that the FTSE 100 has fallen by nearly 10 per cent over the past ten years. While the five-year figure is marginally positive, the one and three-year figures are both strongly negative.

Over the same ten-year period, continuous investment in a good quality, investment grade corporate bond fund would have produced growth of over 50 per cent.

The five-year figure is double that of the FTSE, and the one and five-year figures are both positive at about 10 per cent.

Even more striking is the fact that the same bond fund has at worst fallen by 2 per cent within any of the quoted periods, while the FTSE has seen falls of up to 40 per cent. So, not only has the index failed to make investors any money in ten years, but there have been some truly dreadful points along the way.

Now, it must at this point be acknowledged that the best actively managed UK equity funds have produced good positive returns over the last five and ten-year periods, well in excess of the index. However, the average performance of funds within the UK All Companies sector is only marginally above that of the index, so only exposure to the very best funds will have delivered good results.

So why is so much negative comment directed at the fixed interest sector, and corporate bonds in particular? I regularly read of warnings of a bubble about to burst, or that equities always outperform over the longer term. If this is so, then presumably ten years is no longer considered long term. What would serve investors better would be some depth behind comments, rather than a dismissive "it has always been thus".

It is rare to encounter a potential investor who demands the very best returns, yet the investment press continues to carry predictions of where the greatest returns are to be found. I have dealt for a good number of years now with clients who clearly seek returns in excess of deposit accounts (why else would you bother?), but who definitely wish to protect the value of their capital over the years, rather then invest speculatively to chase massive returns and by so doing expose their money to significant risk.

In other words, investors tend to be loss averse. So, when an opportunity such as that of corporate bond markets over the past nine months or so presents itself, it should be embraced. Of course care needs to be taken in terms of reading the changes that will inevitably occur in these markets, but to ignore the opportunity to make money with little volatility is surely questionable.

What seriously worries me is the widespread belief that last year was a one-off, never to be repeated scenario. Halfway through the next year, little has changed. The index is down year-to-date despite the strong rally, while those same bond funds are already up by around 10 per cent. At the same time, inflation would appear to remain benign for some time yet. An inflationary environment does of course strongly favour equities and destroy fixed interest returns, but, in the meantime, there is money to be made.

So, what does this mean for investors? Simply, to stop living in denial, to stop ignoring fundamentally poor investments and to resolve to do something to improve their situation. It is one of the hardest disciplines to practice, but ultimately will prove to be one of the best.

• Ken Taylor is director of Mackenzie Taylor Wealth Management. www.mtwm.co.uk