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The not-so-Great Rotation

The much anticipated migration of capital from bonds to stocks failed to materialise.

Given the high price of bonds, one of the main investment themes of 2013 was supposed to be the "Great Rotation": the point at which investors began switching out of expensive-looking bonds back into slightly more reasonably priced stocks.

But "as ever, when a widely held view is neatly captured by a snappy moniker, things didn't pan out quite as expected", says Tom Stevenson in The Daily Telegraph. That's not because equities have had a bad year far from it.

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The FTSE 100 is up a very healthy 14% so far, while the S&P 500 has risen a remarkable 25%. But bonds haven't performed disastrously.

UK, US and European bonds are slightly down over the past 12 months, but certainly haven't suffered the rout that we'd see if investors were abandoning them en masse.

So what went wrong with the story? The reality is that growth in the developed world will remain weak and that central banks seem likely to keep interest rates low for the foreseeable future as a result.

In these circumstances, the historically low yields available on bonds still appear acceptable to many income seekers, giving them no particular motive to rush into equities for a small increase in yield. Consequently, the amount of money shifting between the two has remained modest.

Overall, the percentage of UK fund assets held in fixed income funds dropped about 2.9 percentage points over the past, while the percentage held in equity funds rose by 3.4 percentage points, says Esther Armstrong on III.co.uk. "Not so much a great rotation, but more of a mild reallocation."

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