Investors should look to diversify as there continues to be a number of “impossible things” to overcome in the current uncertain world, says Chris Lees, manager of the JOHCM Global Select fund. 
“The world might look the same, but there’s more changes going on than I’ve ever known in my investment career,” he said.
This year has been unpredictable, to put it mildly, with a series of events and outcomes that many investors and analysts had not seen coming.
“We call it Alice in Wonderland; Alice found herself in an inside-out back-to-front world and I think that’s why we’re all finding it so difficult at the moment,” Lees added.
He says one of the biggest impacts on investors so far has been loose monetary policies around the world, with zero and negative interest rates being used by a large portion of central banks.
This has led to government bonds falling to (in some cases) negative yields as investors desperately search for sources of security.
Performance of index over 5yrs
Source: FE Analytics
As the above graph shows, bonds have rocketed over the last 12 months, returning 31.23 per cent to investors.
Lees said: “If I had stood up on stage five years ago and forecast that a third of the world’s bonds would trade at a negative interest rate in five years’ time what would you have done? You certainly wouldn’t have believed me.
“You would have said that’s impossible but that’s the card we have been dealt with, we have to invest in a world where a third of bonds are trading at negative interest rates.
“It reminded me of a very famous quote from the Queen in Alice in Wonderland when she says: ‘Sometimes I think of 6 impossible things before breakfast.’
“Challenge yourself to think okay we’ve had one impossible thing, negative interest rates, so what’s coming, because there’s going to be a lot more impossible things.”
This has led to another ‘impossible thing’ to happen so far in 2016 - the change in the relationship of bonds and equities.
Traditionally, bonds have been bought for their yields, with investors looking for a secure, income paying asset, while equities have been bought predominantly for capital appreciation.
“For my entire investment career, up until earlier this year, global bonds yielded more than global equities. So this is the second impossible thing, global equities now yield more than global bonds.”
Low interest rates have meant investors have been forced in to riskier areas of the market, such as equities, for their income as the below graph shows. Since the start of 2016, bonds have risen 28.18 per cent while equities have gained 25.46 per cent.
Performance of indices over 5 years
Source: FE Analytics
This is in stark contrast to the inverse relationship seen historically, and Lees says: “It’s a strange world we live in where, year-to-date, people have been buying equities for yield and buying bonds for capital appreciation.”
“Equities win the least ugly competition and that’s what we’re faced with at the moment,” he added.
“That’s upside down to the last 30 years of finance and we expect more of these ‘impossible things’ to happen. We expect more changes.”
The third ‘impossible thing’ to happen this year was the UK’s decision to leave the European Union through the referendum on 23 June.
“The polls were not predicting Brexit but it’s happened. Brexit – it’s the third impossible thing,” Lees said.
Heading into the vote, it was forecast to be a close-run referendum, with the Remain campaign likely to win by a small margin, but the final result was four percentage points in favour of Leave.
Lees says however, that investors should not be put off investing by this event, which is globally seen as “short-term negative but long-term positive”.
Indeed, as the below graph shows, equities have rebounded strongly since the vote, with the FTSE 100 up 12.27 per cent since the Brexit vote.
Performance of index since the EU referendum
Source: FE Analytics
While there may be “three to five years of nasty negotiation” Lees points to other countries such as Switzerland and Norway, which are both outside the EU but have working arrangements, as examples that trade agreements can be made.
However, what Brexit has shown is a move away from globalisation and the relative ‘normal’ that investors have become accustomed to.
Across the world, other events, such as the independence of Catalan and the surprise rise of Republican US presidential candidate Donald Trump have shown the unrest is global.
“When you take a global perspective and step away from these seemingly isolated individual events there’s a clear trend – Brexit is part of a wider anti-establishment political crisis,” he said.
He added: “The 99 per cent are furious with the 1 per cent.
“For the past 15 years it’s been about investing in the winners of globalisation, but that’s probably changing. Number four impossible thing - that perhaps we’ve had peak globalisation.”
He says investors should challenge themselves to think of the final two impossible things that could happen before the end of the year, “because there’s going to be a lot more impossible things”.
“However, it’s never too late to diversify is the clear message from these and other crises that we are going to live through over the next few years,” he added.
Lees runs the JOHCM Global Select fund with Nudgem Richyal, which has been a top quartile performer in the large IA Global sector over one, three and five years.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The £2.3bn fund has returned 171.08 per cent to investors since launch, beating the benchmark by 31.01 percentage points and the sector by 54.47 percentage points.
The three FE Crown-rated fund is underweight in the US, though this still accounts for more than half of the fund’s allocation, but is overweight in Europe, Emerging Latin America and Pacific Asia and has exposure in most of the world’s largest markets.