THE tide has finally turned – investors are beginning to wake up to the opportunities in equities.
They were shy coming round.
According to statistics from the Investment Management Association, more than half of all fund sales in July went into fixed income.
Four of the top five most popular fund sectors were bonds.
July was no anomaly – it was the 11th consecutive month that bonds proved to be the most popular asset with investors.
Despite offering close to no capital growth and no scope for income growth, this year has proved so far to be the year of bonds.
Such was the clamour for dependable income, bond managers themselves warned of a bubble.
Some fixed interest managers admitted that it was a very challenging time for bond managers and warned investors off buying bonds, as liquidity issues threatened a bond bubble.
That is not to say that all bonds are bad, but when fund managers are actively discouraging investors from buying up their own asset classes, it is surely time to take heed.
New research from Capita Registrars suggests shareholders are finally doing just that.
Between June and August, investors added a net £1.3bn to their share portfolios, ending what Capita described as nine months of extreme caution on equities.
Capita also found that despite depressed sentiment, when the FTSE 100 dropped to 5,260 at the end of May, it was tempting enough to trigger a buying frenzy.
Those brave souls who entered the market in May have been rewarded as the market rose 12 per cent to 5,900 by September. In addition to these capital gains, investors have quite literally reaped dividends.
In the first half of the year, private investors scooped a record £4.7bn of dividends, and can expect a total for this year of £8.8bn, ten per cent more than last year.
If you now compare the income yields available from each asset equities are a clear winner.
Lock cash away for five years and the most you can muster is 3.75 per cent.
A five-year gilt is now offering about two per cent – compared with six per cent five years ago.
A 13-year Vodafone corporate bond is yielding a slightly more impressive 5.6 per cent.
But buy a Vodafone share, and you can benefit from a yield of nearly eight per cent.
In short, cash is bad, bonds are flat and equities offer growth, income and income growth.
But equities are not without risk. Volatility, we are told, is here to stay.
As the US recovers from super storm Sandy and the problems roll on in the Eurozone, it would be naive to assume that the bounce in equity markets since June is a permanent trend.
But to benefit from a market rally, you have to be invested.
Even cautious investors should not discount equities completely – equity exposure can help fund managers to make a real, inflation-beating return, which “safer”
assets such as cash and gilts cannot manage.
A balanced portfolio should be positioned so that you can benefit from all eventualities in a market cycle.
Sentiment may be depressed but so are companies’ valuations.
History decrees that now could be the right time to buy equities as you do not want to buy when the market is buoyant and companies are expensive.