Gilt and gold funds surge in risk-off August

New York (Sept 2)  Rising trade tensions, fears of an impending US recession and continued Brexit uncertainty have weighed on sentiment during the past month or so.

The worries have caused a number of global multi-asset fund managers to cut their allocations to global equities, with UBS Wealth Management announcing it had taken its portfolio to underweight equities for the first time since the 2012 eurozone crisis.

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A rotation into safe havens has served to push bond yields down to record low levels, with the stock of negative-yielding debt having surged past $17trn.

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"Bond markets globally clearly think the worst, with many government bonds lurching down in yield and up in price in August," said Ben Yearsley, director at Shore Financial Planning.

"The US ten-year ended at 1.49%, the UK at a miserly 0.48%, despite Brexit, and the ten-year bund currently offers minus 0.7%.

"The latter is fascinating as what happens to German bunds when the ECB inevitably launches the next round of QE? Europe has turned Japanese. There was much talk about the inversion of the US yield curve leading to recession, but Europe appears a bigger concern."

As a result, the best-performing Investment Association (IA) sectors were mainly bond-focused, with gold also performing well; funds in traditionally riskier sectors, like equities, continued to struggle.

The two best-performing IA sectors by far were UK Index-Linked Gilts and UK Gilts, with the average fund in those sectors returning 7.6% and 4.89% respectively.

Beneficiaries included Janus Henderson Index-Linked Bond, ASI Sterling Inflation-Linked Bond and Fidelity Institutional UK Index-Linked Bond, with the passive iShares Index-Linked Gilt Index also performing strongly.

Gold funds surge, Latin America lags

Gold also had a strong month, with the price of the precious metal rising 6% in August to $1,529. MFM Junior Gold was once again one of the best-performing. In the three months to 31 August it has returned more than 50%. Charteris Gold & Precious Metals, BlackRock Gold & General and Investec Global Gold also did well.

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Yearsley added: "After a number of years when gold had been dismissed, and crypto currencies had seemingly become the de facto alternative to mainstream currencies, 2019 has shown you can't write off the allure of the shiniest metal.

"Is it a surprise that US real rates have started to fall in 2019 and gold has risen? Many see this as the driver of the gold price and not supply and demand."

The bottom of the tables for August were dominated by equity sectors, particularly those connected to global trade concerns and Brexit. In particular, the Global Emerging Markets, Asia Pacific ex Japan and North American Smaller Companies struggled.

Adrian Lowcock, head of personal investing at Willis Owen, explained that Latin American funds led emerging markets lower, "as a surprise result in Argentina's election sent the stock market plummeting, falling 48% (in US dollar terms) in one day".

Neptune Latin America, Invesco Latin America, ASI Latin America Equity and Scottish Widows Latin America were all in the worst 10 performers.

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