The assets to buy now – April 2016

Asset allocation is at least as important as individual share selection. So where should you be putting your money? Here’s our monthly take on the major asset classes.

MW portfolio icon - bonds

Bonds

Taking more risk

Investors have rediscovered their appetite for risky debt. After a heavy sell-off in the second half of last year, bonds issued by companies with poorer credit ratings (known as junk bonds, or high-yield bonds) staged a strong rally in March. The spread between the yield on the Bank of America Merrill Lynch US High Yield index and the yield on US Treasury bonds fell back to around 7% at the end of March, from a high of almost 9% earlier this year (falling bond yields mean rising prices).

This reflects optimism that rising defaults among American energy and commodity companies won’t affect the wider junk-bond market. That bet may prove correct in the short term, if the Federal Reserve holds back from tightening monetary policy and America avoids a recession. Nonetheless, the balance sheets of American junk-bond issuers look stretched, with an average debt-to-earnings ratio of almost five, compared to around three in 2011. When the credit cycle turns, defaults and losses are likely to be severe. Don’t be tempted by eye-catching yields; stick to the highest-quality issuers for your bond portfolio.

MW portfolio icon - cash

Cash

No change

The US Fed left interest rates on hold in March, as was widely expected. While there are some signs of growing disagreement among Fed members over how fast rates should rise, there seems little doubt that they will opt to act as slowly as they can. However, while headline inflation remains low, this is largely due to falling oil prices; underlying “core” inflation, which strips out volatile energy and food prices, is picking up, implying the Fed might be forced act more rapidly later this year. Since the Bank of England is unlikely to raise rates before the Fed, this will also be important for UK monetary policy.
MW portfolio icon - equities

Equities

A growing gulf

Stocks staged a strong recovery in March, led by America: the S&P 500 is within 100 points of regaining its all-time high. While America’s economy looks in better shape than much of the rest of the world, the disconnect between investors’ optimism and weak earnings makes it difficult to be bullish on US shares (see page 6). We favour Europe, Japan and some emerging markets, which all look more reasonably valued.

Commerical property portfolio icon

Commercial property

Out of steam?

UK commercial property sales fell by almost 60% month-on-month in February, to £2bn. This could reflect uncertainty among foreign buyers over whether the UK will vote to leave the European Union. But it may also imply that the strong capital gains from rising values in recent years are coming to an end, meaning future returns are likely to be driven by rental income.

MW portfolio icon - gold

Gold

A quiet month

After a strong start to the year, gold finished March little changed at around $1,240 per ounce. Another strong surge looks unlikely for now, but gold could benefit if inflation starts to pick up and the Fed appears to be dragging its heels.

The MoneyWeek investment trust portfolio

 

Investment trust Ticker Date bought Price when bought Date sold Price at 29/3/16, or when sold Change Total return (divs reinvested)
BH Macro BHMG 15/06/12 1,948p 11/10/13 2,056p 5.5% 5.50%
Caledonia Investments CLDN 11/10/13 1,830p n/a 2,280p 24.59% 33.27%
Personal Assets PNL 15/06/12 36,000p n/a 36,800p 2.22% 9.08%
Scottish Mortgage* SMT 15/06/12 642p n/a 256p 99.38% 109.38%
Finsbury Growth FGT 15/06/12 331.75p n/a 595p 79.35% 94.22%
Capital RCP 15/06/12 1,238p n/a 1,620p 30.86% 39.49%
3i Infrastructure 3IN 15/06/12 124p 18/09/15 167.5p 35.08% 60.39%
Law Debenture Corporation LWDB 18/09/15 503.5p n/a 457.5p -9.14% -7.00%
Portfolio return** 44.81% 56.99%
FTSE All Share 18.15% 34.48%
MSCI World*** (excl. EMs) 47.43% 62.05%
MSCI World*** (incl. EMs) 40.61% 54.60%
* Return adjusted for 5-for-1 stock split on 30/6/14
** Assumes BH Macro holding rolled into Caledonia
*** Returns in pounds sterling
Investment trust Ticker NAV when bought Latest NAV at 29/3/16 NAV change Prem/disc when bought Prem/disc at 29/3/16 Forward yield
BH Macro BHMG SOLD 11/10/13
Caledonia Investments CLDN 2,311p 2,821p 22.1% -26.28% -19.7% 2.3%
Personal Assets PNL 33,675p 36,552p 8.5% 6.46% 0.7% 1.5%
Scottish Mortgage SMT 138.7p 263p 89.6% -8.02% -2.57% 1.1%
Finsbury Growth FGT 328.2p 594p 81.0% 1.07% 0.1% 2.1%
Capital RCP 1,211p 1,550p 28.0% 2.18% 0.2% 1.9%
3i Infrastructure 3IN SOLD 18/09/15
Law Debenture Corporation LWDB 461p 525p 13.9% 8.5% -12.3% 3.7%