Polish debt has delivered the best risk-adjusted return since the 2008 collapse of Lehman Brothers, followed by New Zealand debt and Bank of America Merrill Lynch's Global High Yield Index, according to the Bloomberg Riskless Return Ranking.
Each returned more than 10 per cent when adjusted for volatility, according to an analysis of almost 200 securities, indexes and industries. By contrast, global stocks, as measured by the MSCI World Index, rose 2 per cent.
It’s the last thing many investors would have expected in the dark days of five years ago, when Lehman Brothers helped trigger the worst financial crisis since the Great Depression and the deepest global recession since at least World War II. Those who profited rode on the backs of central banks that slashed interest rates and bought assets to save and then support economies and markets.
"Given that the world was looking at a depression with the possibility of serial defaults, a better market risk adjustor at the time would have been the probability and extent of permanent loss," said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. in Newport Beach, California. "If you knew then what you know now, you would have seen governments and central banks successfully doing whatever it takes to normalise markets and, moreover, persisting with policy experiments thereafter."
The less prescient -- that is, most investors -- fled risky assets. They did so as they fretted more banks would fold or companies wouldn't be able to fund themselves, said Stuart Stanley, a fund manager at Invesco Asset Management in London. The BofA Merrill Lynch index fell 1 per cent in the rest of 2008 after the bankruptcy, the weakest performer of those tracked. "What you had in retrospect was a dramatic overreaction to risk markets," he said. "The economy finding support and rates falling dramatically all made high yield attractive after 2008."
On a risk-adjusted basis, bonds have proved a winning bet since the bankruptcy filing. Buyers of Polish government debt recorded returns of 12 per cent and those who added New Zealand bonds to their portfolio logged an 11 per cent return. The returns are in local currency and don’t include the impact of exchange-rate swings.
The debt of South Africa, the Czech Republic, Finland and Hungary returned more than 7 per cent. US debt over the period returned 3 per cent while crisis-lashed Greece’s debt was the worst performer among bond markets studied, losing 1 per cent.
Stocks showed a similar pattern. The ability of Asia’s emerging economies to outpace the developed world and power the globe out of its slump was reflected in the 9 per cent climb by the FTSE Bursa Malaysia KLCI Index and the 7 percent increase in the Jakarta Composite Index in Indonesia. By contrast, the US’s Standard and Poor’s 500 Index and the Stoxx Europe 600 Index both returned about 2 per cent.
The market for high-yield bonds, with securities rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard and Poor’s, also turned out well. The BofA Merrill Lynch index returned 11 per cent and its Global Corporate and High Yield Index 7 per cent. The risk-adjusted return, which isn’t annualised, is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses compared with a security whose price moves at a steady rate.
Bloomberg
