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AMP pulls back from bonds

Cash is now providing a better insurance option for investment portfolios than bonds, says AMP Capital’s head of investment strategy.

Monday, 20 April 2015

by Susan Edmunds

AMP Capital held its first quarterly media briefing for the year today.

Its analysts said the start of the year was looking a lot like 2014, as US first-quarter growth came in weaker than expected, central banks eased more than expected, and bond yields moved lower while equities have rallied.

An unprecedented level of quantitative easing, lower rates and lower oil prices have been a boon to share markets so far, especially Eurozone and Japan shares.

Eurozone shares are also benefiting from a pick-up in growth and the long-heralded recovery in earnings. 

New Zealand share returns have also been healthy with reasonable earnings and higher dividends contributing to the positive economic backdrop.

All of AMP Capital’s Diversified Funds produced positive results with the AMP Capital Growth Fund delivering the best result, returning 5.0% over the quarter and 14.6% for the year to 31 March.  The AMP Capital Balanced Fund and the AMP Capital Responsible Investment Leaders Balanced Fund returned 4.0% and 3.7% respectively for the quarter and 12.3% and 13.3% for the year to March.  The AMP Capital Conservative Fund returned 2.7% for the quarter and 9.0% for the year to 31 March.

Head of investment strategy Keith Poore said AMP Capital’s key calls remained essentially the same as the previous quarter.

“We expect bond yields to move modestly higher over the next twelve months as the US takes the first small steps toward policy normalisation,” he said.

AMP is now overweight cash and underweight bonds because its analysts expect similar returns from cash and bonds over the medium term, but cash has a lower risk of capital loss.

Poore said he would never advise throwing bonds out of a portfolio entirely. “I still think they would offer some insurance during a negative event.”

But he said that aspect was muted because there was little room for yields to fall much further. “The yields are so low that the risks are skewed.”

The aggregate yield on global treasury bonds dipped below 1% over the quarter. Nominal yields in Europe are negative and there are very low yields in other major markets.

Poore said it was likely that insurance companies and liability-driven pension plans were regulated to own bonds and the larger gains in equities meant some funds were likely selling equities to buy bonds to rebalance to target allocations.

AMP NZ Chief Economist, Bevan Graham, said that the outlook for the global economy was “uneven”.  “Despite a weak start to the year underlying economic fundamentals continue to improve in the US.  That should see the US along with New Zealand remain one of the stand-out performers amongst the developed economies,” he said.

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