Normally, even in a crowd, it is easy to spot a novice investor who has invested in equities as compared to his counterpart who has invested in fixed income securities. While the fixed income investor is timid and keeps a low profile, the equity investor struts about and has an air of superiority about him. He knows that he is a bit of a dare-devil and is risking his precious capital by investing in stocks. He also believes that he has a superior intellectual framework which will help him home in on mega-baggers and walk on the same path as the living legends.
However, the savage sell-off in equities over the past few weeks has turned the tables somewhat. Now, it is the fixed income investor who is strutting about while the equity investor is keeping a low profile.
The confidence of the equity investor is already at an all-time low. It has now received an irrecoverable body blow due to the grim pronouncement of R. Sivakumar, the ace fund manager with Axis Mutual Fund.
Sivakumar has impeccable credentials. He has mastered the fine art of investing in fixed income securities. He manages a mammoth portfolio of Rs. 23,000 crore and so one can be sure that he knows what he is talking about.
In his latest interview to Forbes India, Sivakumar has dropped the bomb shell that bonds have not only out-performed equities in the short-term but even over the medium term of five years and long-term of 21 years, bonds have delivered higher returns than stocks.
Sivakumar explained his point in pithy words “Over 21 years, bonds have actually outperformed equities. If you break the last 20 years into five-year periods, you will notice that in two periods, equities have outperformed. In the other two periods, bonds did well. Between 1995 and 2000, bonds returned 14.8 percent and equities gave 6.8 percent; between 2010 and 2015, bonds returned 9.2 percent and equities returned 5.3 percent.”
Sivakumar added that the belief amongst rank and file investors that equities outperform bonds is based on a misconception. He pointed out that the reality is that while over the long term, bonds and equities give equal returns equities carry a huge failure rate which doesn’t get captured in the data on returns. This makes them a worse investment option as compared to bonds, Sivakumar said.
The bottomline of Sivakumar’s advice is that investors should always have a “diversified” portfolio in which there is proper allocation given to all assets classes such as equities, debt and gold. “You have to be seriously unlucky to lose money if you are invested in these three asset classes equally” Sivakumar added with a chuckle in his voice.