A year of wealth preservation

With the seasonal festivities of the year end now a distant memory, and with the trends for 2010 less than well-developed, I asked Glyn Owen, director at RMB Asset Management in London for his view of 2010. As a multi-manager, Owens is responsible for meeting managers across the full asset and management style range.

Extracts from his response:

"As we enter 2010, the contrast with a year earlier could hardly be more stark. Then we faced a financial meltdown, the prices of risk assets were in free fall and investor sentiment was universally negative.

"At the beginning of 2009, no doubt we all would have settled for the year's outcome; indeed had anyone in the early months of the year predicted anything approaching the investment returns actually achieved they would have been viewed with incredulity.

"In the event returns were more than satisfactory; the worst performing asset classes in 2008 turned round to provide the best returns in 2009, with credit leading the way, followed by convertible bonds, equities, property securities and commodities. Developed world government bonds, the ultimate safe haven in 2008, produced the weakest returns in 2009, as investor risk appetite began to return.

"There have been many lessons learned during the tumultuous past two years but 2009 has been a perfect illustration of the great benefits of multi-asset, multi-style investing, of dynamic asset allocation using the full range of asset classes, and of the critical importance of valuation (price really does matter!) in determining asset allocation positions.

Oversold

"A year ago, many risk assets became heavily oversold, with some moving to multi-decade valuation lows as investors deleveraged with a vengeance.

"In particular, credit markets offered once-in-a-generation opportunities and those investors who missed that lost out on spectacular returns, achieved at low levels of volatility and risk.

"Equities too were supported by high dividend yields (a year ago most equity markets offered prospective dividend yields higher than government bond yields) and the corporate sector bounced back strongly with aggressive cost cutting and an end to inventory slashing. Within equities it was deep value stocks which rallied the hardest, leaving defensives and quality stocks well behind.

"Strategic diversification of equity style again paid off, as few investors were buying into deep cyclicals in early 2009, yet that is where the very best returns were produced in the rest of the year.

"The decade just ended has demonstrated vividly the importance of understanding the behaviour of asset classes and why they are held in a portfolio. Exceptionally, the first decade of the millennium produced a negative return from the world's developed equity markets; the MSCI World index returned -2.5 per cent between the end of 1999 and end 2009.

"In contrast global government bonds returned 91 per cent over the same period, protecting investors from the ravages of two equity bear market crashes of over 50 per cent, and in the past two years providing the ultimate safe haven as the world faced the prospect of a systemic financial collapse.

"Many excesses of recent years are yet to be unwound. To date the global economy has been saved from deflation and a prolonged deep recession by extraordinary and unconventional monetary policy measures, which must end in due course, and by fiscal stimulus of unprecedented scale, which has had the effect of replacing private sector debt with public sector debt.

Excesses

"For many nations the unwinding of excesses presents a choice between deflation, devaluation or default. With credit availability still restricted by the need for banks to restore balance sheet health, and with deleveraging likely to be a multi-year process, growth prospects appear to be muted.

"Yet interest rates in most of the developed world cannot fall further; they are already at near zero levels. The options available to governments and central banks are now much more limited; there is little or no room to counter any further shocks to the system.

"These extremes of uncertainty come at a time when there are no longer valuation extremes in markets. On some measures, equities are now fully valued while the credit opportunity has largely played out.

"Property remains over supplied in many countries. "Commodity markets have boomed in the past year but face the prospect of more subdued demand for some time as the global economy rebalances.

"Without such rebalancing, involving much greater domestic demand growth in the developing world and a realignment of currency values between emerging and developed nations, a sustainable global recovery seems a distant prospect.

"I suspect 2010 will be a year for wealth preservation as we face such high tail risks and daunting uncertainties globally.

"A year of high single digit returns would seem at this juncture to be a reasonable outcome and expectation, albeit with some considerable volatility on the way.

The writer is chairman of Mondial Financial Partners International