The Danish Investment Fund Association (IFB) has warned that performance figures for fixed income funds through November suggest that investors should ensure they are sufficiently diversified to handle short term interest rate swings in the wake of fiscal policy changes in the US.
That policy is set to change with proposals from president elect Donald Trump of greater expenditure in areas such as infrastructure. This has seen the dollar strengthen against other currencies, rising short term interest rates in the US, as well as rising stock markets, and generally a belief in more inflation, IFB noted in its latest monthly report.
The rising dollar has hit emerging markets investments, particularly Latin America equity, although a stronger dollar has been beneficial for Japanese exporters.
But for investors who through the earlier part of 2016 had seen strong returns from fixed income, the election of Trump has focused attention on the speed with which sentiment can change. For example, IFB notes that global equity funds typically made gains in November alone of 4% as reported in Denmark, while North American equity funds saw returns of 7.6% on average.
Some equity sectors did less well, such as Latin America – down 9.3% – but the equity gains generally contrasted with losses across the board of fixed income fund categories.
Danish long term bond funds lost 0.6% on average, while funds invested in other Danish bonds lost 0.3% over the month.
Emerging market bond funds typically lost 4.3%, while funds focused on investmnt grade and non-investment grade bonds lost 1.1% and 0.6% respectively, IFB reports.
That said, the year-to-date returns on bond funds remain positive, despite the significant reversal seen in November. Funds in ‘other’ Danish bonds are still up 2.9% to the end of November, while emerging market bond funds are up 7.6%, investment grade bond funds are up 3.2% and non-investment grade bond funds are up 6%.
Anders Klinkby, CEO of IFB, said the relative reversal in fortune between equity and bond based funds illustrated just how important diversification was to maintain.
“Most people were surprised that the mood changed so quickly in financial markets. Suddenly, equities were rising but bonds falling. That is the opposite trend to what we have seen through most of 2016. It show how important it is to spread risk and create a portfolio that can manage reasonably well in most situations,” Klinkby said.
Retail investors in Denmark went heavily into equity funds through November, making net purchases for some DKK7bn (EUR941m), of which DKK6.3bn went to global equity funds. But on a net basis, the same investors sold funds invested in Danish and foreign bonds to the tune of DKK1.8bn and DKK2.5bn respectively.
Total industry assets rose by some DKK6bn through the month to DKK1.946trn (EUR262bn)