How well will investment portfolios perform in 2013?

Shares did well in 2012 and could do the same this year, says our investment columnist John Hildebrand

John Hildebrand
John Hildebrand

Given the poor economic background, you might be pleasantly surprised at how your charity's investment portfolios performed in 2012. By the end of November, many of you had seen your funds generate returns of close to 10 per cent over the calendar year. So why have endowments performed so well, and how might they do in 2013?

Equities began 2012 on lower than average valuations. The UK had already seen a decade of poor market returns and retreated another 3.5 per cent in 2011. You can never tell what will happen, but if a market starts off looking cheap, there is an above-average chance that it will perform well.

In November 2011, there were worries about a Greek exit from the euro and the pressures this might place on other eurozone countries. This was highlighted by the yield on Italian debt hitting 7 per cent in January last year. By the end of November last year, it had fallen to less than 5 per cent. When Mario Monti, the president of the European Central Bank, said that he would do "whatever it takes" to save the euro, this helped support the currency and sovereign bond markets, easing concerns a little.

Monetary policy across Europe and the developed world continues to be targeted at keeping interest rates low. This supports equities and bonds, but means charities holding high levels of cash will have a tough year in 2013.

Low interest rates have helped support assets in general. Although UK government bonds looked expensive at the beginning of the year, they stayed expensive and should produce small positive returns in 2012. Many charities have invested in corporate bonds and will have benefited from this, as they performed well in 2012. Corporate bonds still look attractive compared with government bonds, but no longer offer great value in their own right.

Equities continue to be on below-average valuations and offer a good income, as does property, though landlords will struggle to push up rents and capital values are unlikely to increase. Infrastructure assets offer an interesting alternative to bonds.

If your charity has an investment portfolio that has fared better in 2012 than you expected it to, similar themes could again bring surprising benefits in 2013.

John Hildebrand is an investment manager at Investec Wealth & Investment

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