Cautious investing paid off more than high-risk strategies for UK charity portfolios last year, according to preliminary figures from Asset Risk Consultants (ARC).
It is the first time since 2011 that lower-risk portfolios have performed better than their higher-risk counterparts.
Graham Harrison, managing director at ARC, said: “With the mainstream equity markets recording returns ranging from marginally positive (UK equities) to circa 9% (US equities), 2014 will go down as a year when the UK bond market unexpectedly outshone its equity counterpart.”
While the ARC Cautious Charity Index made the biggest gain – 6.5% – for the year to 31 December 2014, the ARC Equity Risk Charity Index – the riskiest portfolios – gave the poorest return, at 4.5%.
The two intermediate indices achieved returns commensurate with the amount of caution in the portfolio.
Returns were 5.9% for the ARC Balanced Asset Charity Index, and 5.1% for the higher-risk ARC Steady Growth Charity Index.
However, cumulative returns still increase with portfolio risk.
Three-year returns (to 31 December 2014) for the indices range from 20.2% for the Cautious Index to 38.6% for the Equity Risk Index.
And annualised performance figures since the indices were launched in December 2003 are 5.3% (cautious), 6.2% (balanced asset), 6.8% (steady growth) and 7.2% (equity risk).
The ARC indices are calculated from the actual performance (net of fees) of around 1,500 segregated charity portfolios run by 28 asset managers, although for the preliminary figures fourth-quarter performance has been estimated.
There are no asset class restrictions: portfolios are classified according to their volatility in relation to UK equity markets.
For example, the ARC Cautious Charity Index has 0-40% risk relative to UK equity markets, while the ARC Balanced Asset Charity Index has 40-60% risk.
Harrison said: “Going into 2014, few market commentators were predicting returns from government bonds would exceed those from equity markets, but that is what transpired.
“Double-digit returns were recorded from 10-year Gilts (both conventional and index-linked) for 2014, as yields moved down from 3% on the 10-year Gilt to end the year at just 1.75%.”
And he warned that there was a mathematical possibility that bonds could outperform again in 2015.
He said: “If the 10-year Gilt yield were to fall below 1%, double-digit returns would again be recorded for bond indices.
“With consensus for UK equity market returns in the 5-10% range, a repeat of 2014 cannot be ruled out.
“However, most market commentators expect yields to rise over the course of 2015 and are predicting negative returns from government bond indices.”
Harrison also said 2014 had proved to be a volatile but ultimately positive year for most institutional investors.
But he said: “Since 2009, government and central bank manipulation of interest rates and bond markets has spilled over into exchange rates, equity markets and real assets, and finding alpha has become more of a struggle.
“Institutional portfolios have been moving up the risk spectrum towards an ever-increasing exposure to large international equities with solid dividend prospects.”
Harrison concluded: “We believe that 2015 will be a year of ascendancy for actively managed versus ‘passive benchmarked’ portfolios, as financial markets move from being liquidity-driven, and economic fundamentals assert themselves.”
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