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Japanese equities, bonds and gold provide protection during volatile summer


The old adage, “Sell in May and go away, don’t come back until St. Leger’s Day,” proved to be sound advice this year. However, some sectors provided ample protection and even delivered handsome returns. The “safe havens” for summer 2011 proved to be UK and global bonds, Japanese equities, and gold, according to data from FE Analytics.

The best performing IMA sectors over the summer months were IMA UK Index-Linked Gilts (4.69%), IMA UK Gilt (4.66%) and IMA Japanese Smaller Companies (4.36%), FE Analytics showed.
The top three performing funds in the IMA unit trusts and OEICS universe all invested in Japanese equity.  Not only did these funds provide some sunshine during an otherwise dismal summer, but they have also rewarded investors over the longer term.Manager selection was an important factor here. The IMA Japan sector returned -0.86% for the three months to 31 August 2011 and 7.08% over three years.
At the other end of the spectrum, European equity was the worst performing asset class over the summer, from a UK investor’s perspective. The IMA Europe Including UK sector lost 15%, the IMA European Smaller Companies sector was down 15.13%, while the IMA Europe Excluding UK sector fell 16.14% in sterling terms.  Currency would have been a factor in these results. 
The 10 worst performing sectors were all equities as global stock markets took a battering from recessionary fears and the Euro Zone’s ongoing sovereign debt crisis.  During the three months to 31 August 2011, the FTSE 100 fell 8.97%, the MSCI All Country World Index lost 9.28%, the S&P 500 was down 8.40% and the MSCI Emerging Markets Index fell 9.77%.
Pascal Dowling, Investment Specialist at FE, says: “This research highlights in bold print the value of diversification.  Japanese equities, so long in the doldrums, experienced a tremendous rebound this summer, but it’s worth bearing in mind the context of that bull run.

“Investors abandoned Japan in droves as the full extent of the catastrophic tsunami and subsequent nuclear accident became clear, wiping nearly 20% off the Nikkei 225 virtually overnight.  When the water had receded and the nuclear crisis was under control, many investors took advantage of low valuations in Japan and bought in, spurred on by the vigour with which the Japanese people seemed to deal with the disaster and begin rebuilding, but the Nikkei remains far below where it stood at the start of the year.
“With the disaster in Japan weighing heavily on global confidence at the start of the year, the unfolding debt crisis in Europe has seen risk appetite, and equity markets, plummet.  As a result gilts – tipped by many at the start of 2011 as the big losers for the year – have performed steadily while gold, already at record highs, has gone from strength to strength.
“Nobody could have predicted any of this, certainly not in combination, but a balanced portfolio with diversification including asset classes and geography would have benefited from all of these factors, and protected investors from the downsides where they existed.
“A realistic approach to tactical asset allocation, and a steady nerve, would also have helped – as it became increasingly apparent that Japan had become oversold thanks to investors’ propensity to flee for the hills when things turn ugly, even when fundamentals are positive.”

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