Headline markets were strong in Q1 2021, responding to the largely successful, if patchy, rollout of the Covid-19 vaccine and the simultaneous opening up of economies in the developed world, an improving macroeconomic picture and continued fiscal stimulus. Equity markets continued to rise, though there was significant dispersion between sectors with ‘value’ equities substantially outperforming ‘growth’, a strong reversal from 2020 and reflecting a rotation towards those companies which are most likely to benefit from the re-opening of economies. One area that did not fare well during the quarter was fixed income, which suffered as rates increased (the yield on the US 10-year Treasury rose 83bps to 1.7%), showing what we believe is the continued asymmetry of owning fixed income.
There is every reason to expect very strong economic growth throughout the rest of 2021 and the positive data from Q1 to continue. The biggest risk to investments today is the potential for inflation, and the accompanying rise in interest rates. An increase in Inflation seems inevitable, but its scale or permanency is unknown. Many assets, particularly in fixed income, have low upside, which itself is dependent upon supportive conditions remaining and significant downside if they do not. It is a time to be positive on economic improvements, but selective on where to take risk.
We feel that hedge funds are a compelling investment in a variety of strategies, offering strong returns and avoiding some of the clear risks to traditional investments. Our lower risk relative value strategies generated good, positive returns in Q1 whilst bonds fell in value. Focused equity managers can identify winners and losers in a rapidly changing landscape whilst our private credit managers are seeing a large spread between the opportunities available in illiquid credit compared with liquid credit and are targeting double-digit annualised returns.