Tag Archives: Investment Trusts

Gold – the ultimate hedge, or an increasingly irrelevant asset?

4 Jun

Whether or not you are a gold bug, as followers of the yellow metal are sometimes known, the reality is that gold remains a popular investment asset. More than any other precious metal, gold is where investors turn at times of economic, political and social unrest or as a hedge against currency crises and stock market weakness. Just recently the returns have been less than golden, but opinion is as divided as ever over what the future may hold in store. 

However, the swift reversal in the fortunes of gold – down from a high of over $1900 in 2011 to just above $1,300 this year – has led to technical analysts calling a new bear market. Yet conditions around the world – conflict in Syria, problems with North Korea, continuing concern over economic strength and low-interest rates – set a scene that many would consider conducive to continuing demand.

The recent collapse in the gold price owes much to the increasing level of speculation that surrounds this asset, an approach made easier through the introduction of sophisticated instruments allowing exposure and the use of futures contracts and derivatives. The severe fall in April – the largest for 30 years – was put down to margin calls brought about by recent weakness in the price, thus triggering a further wave of selling. Hedge funds, which are often active in this market, bore the brunt of the blame, though there was some speculation that Cyprus might have to sell some of its reserves as part of the restructuring demanded by the providers of the bail-out fund, perhaps setting the scene for other indebted nations to sell.

However, it is hard to view such concerns as being the reason behind gold’s fall from grace. Cyprus’s stock of the metal is small in international terms, while some governments, such as Sri Lanka, have even indicated that they could take advantage of the decline to add to their reserves. Perhaps a more credible explanation is that the price was driven higher through the availability of cheap money from central banks – itself a response to the financial crisis which gripped the developed world which was just the kind of background that has investors flocking to buy gold as a hedge against uncertainty – and that this will come to an end at some stage.

 

What is the reason for holding gold as an investment?

Make no mistake, gold is currency in its purest form. Until comparatively recently many currencies were convertible into gold – the so-called “Gold Standard”. Globalisation and competitive exchange rates have rendered this particular aspect of gold as an investment largely irrelevant, but it is worth remembering that convertibility into gold was only abandoned by America in 1971.

Perhaps one of the principal reasons for considering gold as a potentially important investment is the limited quantity of it around. It is estimated that all the gold ever mined totals only around 160,000 tonnes – a quantity which veteran investor Warren Buffett once remarked could be held in a cube with sides measuring just 20 metres. The reality, though, is no-one knows for certain how much gold is around, though its durability and the fact that central banks hold a lot of it suggests that most of the gold ever mined is still around in one form or another.

 

Because supply is relatively inflexible (which itself creates a reason for wishing to hold it), price fluctuations are most likely to occur through changes in sentiment. Two macro aspects will influence the price on a regular basis, though. Because gold does not pay dividends and actually costs money to store, interest rates can affect demand, with high interest rates likely to depress the price and low to encourage investing. Recent low-interest rates will certainly have helped the price, with fears that at some stage quantitative easing must come to an end a reason to turn a seller.

 

Similarly, the value of the dollar influences sentiment. Gold is priced in dollars – as is oil, which arguably enjoys some correlation with the gold price – so a weak dollar encourages a rising gold price, just as the recent reversal of the fortunes of the greenback could well have added to the selling pressure. However, gold’s position as a global currency means that some holders will always wish to retain a physical holding in case local upsets render their other assets of limited or unrealizable value. Gold is the ultimate hedge against fear.

 

How might investors gain exposure to gold?

The options available today are far wider – and arguably purer – than those which investors could utilise in the past. Back in 1974, when a global economic and financial crisis on a scale not too far removed from that which gripped the developed world recently brought our stock market to its knees, renowned investor Jim Slater remarked the ideal investment portfolio was shotgun cartridges, tins of baked beans and Krugerrands. This South African minted gold coin closely followed the gold price in value and was much in demand by investors during these difficult times

Gold coins remain an option today, as do bullion bars for the seriously wealthy, but Exchange Traded Funds are now arguably the easiest option for an investor seeking exposure. The first of these to be issued – SPDR Gold – is one of the largest ETFs available, worth around $50 billion. It is also possible to purchase gold certificates, which demonstrate ownership without the costs associated with storage, while derivatives, including CFDs, also provide an option. Gold can easily be included in a portfolio if so required.

 

What about gold mining shares?

One of the less easy to understand aspects of gold investment is that gold shares often do not move in line with the price of the metal. Mining shares, for example, peaked ahead of the gold price and have suffered a torrid time of late. The best known fund, BlackRock Gold & General, includes the term “General” in its title at the insistence of the first manager, Julian Baring. He contended that, while opportunities to profit from gold shares would arise, at times they should be avoided en bloc – hence the ability to purchase other mining assets.

Just recently there has been evidence that the surge in the price encouraged some mining companies to develop higher cost options, which the recent fall in the gold price has rendered uneconomic. Comparing valuations of gold mining shares with those of companies extracting other minerals suggests that this sector of the market’s problems may not yet be over. However, the most important point to make is that mining shares do not automatically confer performance of the gold price to the investor and need to be considered totally separately.

 

Is the future direction of the gold price any easier to forecast than for any other asset?

This is an easy question to answer on the face of it, though what is happening elsewhere in the investment world can give an important steer to how the price might behave. The performance of gold, like any other asset, cannot be forecast with any degree of accuracy. Gold remains an option for those seeking a hedge against the uncertainties that can develop both financially and geopolitically, but is hardly an appropriate investment for anyone seeking income.

That said, there will always be gold followers and gold traders. Watch interest rates and the dollar if gold is an area you seek to follow, but do not expect any silver bullet when it comes to knowing when to buy and when to sell.

Remember, diversification should always be the wise investor’s mantra. So be a gold follower or not, remember not to rely any specific asset class, single strategy or geographic region too heavily – otherwise you risk a higher potential to losses. You could also argue, a higher potential to profits – true but I believe the art of investing is to minimise market losses and enjoy fair potential to market gains. All I would say, is this is a more defensive strategy and has been a successful approach over the last decade or two (showing my age now).

 

So What’s All This About Adviser Charging

29 Apr

Okay, I think it is important to talk about this. From the beginning or 2013, how advisers charge for the services provided has changed; and the service provided has now changed. There is now Independent or Restricted Advisers.

There has been so much focus on what is paid and the general terms are typically, either an hourly rate (average from what I can see around £175 per hour) or where investment advice takes place it’s typically 3% initial (based on the investment amount) and an ongoing servicing fee circa 1.0% (but some institutions will charge more and few less).

business man writing investment concept or investment plan on white board Stock Photo - 13224684

Personally, I believe the big issue is – a fair price is charged for the work done or being done –  what you receive for what you pay. Should Restricted Advice charge the same as Independent Advice? The answer to this is in the detail – so what is the difference?

What is Independent Advice?

The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of genuinely independent advice being free from any restrictions that could affect their ability to recommend whatever is best for the customer. To reflect the range of products that a consumer would expect an independent firm to have knowledge of, and in line with work the European Commission has undertaken.

What is Restricted Advice?

This advice that is not independent and will need to be labelled as restricted advice; for example, advice on a limited range of products or providers.

Where a firm providing restricted advice chooses to limit their product range to certain range of investments or providers, there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable.

I am an Independent Financial Adviser and have specialised in investments and tax planning with the focus on a high level of service, expertise and support. My view on the argument between the different advice type is simple but then again I am very technically focused targeting tax mitigation and investment returns, profitability and success.

My question to you is should you, as the consumer, pay the same for a Restricted Service as for an Independent Service? 

The first point is be aware of the service being provided – make sure if you are paying for the service being provided and in my opinion that should be a fully comprehensive service. Restricted advice is simply that “Restricted” and Independent is “Independent”. An IFA – Independent needs to take into consideration all available contracts, both packaged and unpackaged, available in the UK Markets – assess, consider, review and recommend from every available structure; whereas a Restricted Adviser will sell you a contract from their permitted range.

Clearly, the time and effort and expertise required under both designations should carry a cost reflective to the service provided. I personally believe that the charge for Restricted Advise should be the less expensive option. It seems that many institutions are not differentiating – I assume they are hoping/expecting the consumer not to notice the difference.

Perhaps also worryingly, a number of institutions and banks have declined to disclose their adviser charges with some saying they would not make their limits public (as reported by Citywire, Investment Adviser, Money Marketing, The Telegraph, Financial Times, amongst others).

Of those who have disclosed mandated adviser charges, there is a typical initial charge of around 3% with ongoing charges ranging up to 3% per annum.

I did think of putting together a list of the institutions and the fees paid but felt that this is not constructive. I believe it is wiser to weigh up the pros and cons of what is being offered and the price you are being asked to pay.

Remember, now you agree to a contractual fee arrangement and as with all contracts the terms are binding both ways. If you are paying for annual reviews, on-going investment advice, portfolio stress-testing and your adviser is remunerated relative to their level of success….make sure you get what you pay for. I know my clients do…and it creates very close and personal relationships where my financial interest and their financial success are aligned i.e. I need my clients to be successful and see positive returns on their investments.

All I suggest is take care and consider your options – what you receive for what you pay.

Bill Mott and Neil Woodford Issue Warnings For 2013

15 Jan

Neil Woodford has warned investors to expect further downgrades to profits forecasts for those companies more sensitive to the economic cycle.

Neil Woodford (manager of the Invesco Perpetual Income and High Income funds) paints a pessimistic story for the rest of 2013. He has grave concerns pertaining to the existing problems (eg the ongoing crisis in Europe, a possible slowdown in the US and reductions in borrowings across the western world) will limit the pace of global economic growth. Conversley, in his monthly update, he states he believes there is a “population of stocks that can grow consistently through this difficult period”.

Bill Mott (manager of the Psigma Income fund), has always raised his concerns over the effect of central bank policies,  he has warned that these have raised the chances of increasing inflation by continually introducing unprecedented policies into the market. He believes that these have increased the expectation of a growth in inflation.

“To some extent, inflation is already with us. The Bank of England has exceeded the middle of its target inflation range for 38 months in a row. What is remarkable is that despite this persistent inflation, the UK gilt market is trading at such low yields. Real interest rates on bonds have been negative for some time. Are low gilt yields telling us that the bond markets are relaxed about the inflation numbers? Or is it rather that the same target-busting Bank of England has been the most enormous buyer of gilts and has successfully subverted all price signals?”

Bill Mott has avoided investing in bank shares through the portfolio he manages, Psigma Income Fund. This has caused poor returns (short-term) against his peers. Time will tell if his decision is correct, as there has been a recent period of price rallying in this sector but is this a “true” rally or rather a “relief” rally. The latter will see the prices collapse, or could the pricing be sustainable?

Personally, I have concerns over the banking sector as there are several unknowns which carry a huge risk and could derail the recent optimism, One major issue with this sector is the lack of clarity of information and the continual fiascos constantly being unearthed. I see the comments about RBS and Libor, where the fines could be significantly worse than those suffered by Barclays (but expected not to be as large as those suffered by UBS). This is just an example and who knows what next?

Investment Bulletin – My Views For 2013

7 Jan
Fireworks explode over Times Square as the crystal ball is hoisted before New Year celebrations in New York December 31, 2012. REUTERS-Joshua Lott
What a year 2012 has been. It has not been an easy year and with the Christmas & New Year break, life has been put back into perspective and some sanity has returned. 2012 has ultimately been a good year for my clients and despite the challenges, we have made good gains. The challenges that faced the markets have been considerable:-

  • Disappointing economic growth and corporate earnings
  • US Presidential Election won comfortably by Barak Obama
  • Worrying geo-political developments, such as, in the Middle East and China
  • The ongoing debt crisis in the Eurozone (at times threatening the very existence of the Eurozone)
  • Easing political risk in Europe but still minimal Eurozone growth
  • Consumer confidence growing in the US
  • Relatively successful Chinese growth expected in 2013

Looking ahead, we’re beginning to see signs that a more positive outlook is developing. In the US, in particular, the recovery we see in the housing market could have a meaningful impact on growth prospects. Does this mean that the 30-year bull market in bonds is coming to an end? And should we be braced for an imminent increase in interest rates, reminiscent of the US Federal Reserve’s 2.5% worth of hikes that clobbered bond markets in 1994? I don’t think so. The Fed has said that it won’t raise rates until 2015 and while it could do so earlier, I think that next year would almost certainly be far too soon.

The outlook for returns in 2013 will depend on where you invest, I am confident that there are still attractive investment opportunities in several areas of the investment universe. In these conditions, a flexible approach and experienced active management can really prove their worth.

Markets will worry about the Italian elections in 2013 (likely to be brought forward thanks to PM Monti’s resignation) and in Germany (likely in September 2013) and even about the stability of the coalition government in the UK.

Currently, the most likely outcomes seem to be a strong vote for Merkel and her CDU/CSU grouping in Germany and the election in Italy of a coalition with a strong commitment to the Euro but a rather weaker commitment to structural reform of the economy. 

Worries about the possibility of a hard economic landing in China in 2012 abated with a soft landing and expected growth should be robust in 2013. Although Obama’s re-election does not solve the issue of political gridlock within the polarised system in Washington, growing consumer confidence underpins hopes that the US economy is on the mend.

Above all, markets still take heart from the extraordinary support offered by central banks across the developed world, with ultra-loose policy keeping interest rates and bond yields low, providing liquidity for the financial system and helping governments finance budget deficits cheaply. There may yet be worrying consequences from this grand monetary experiment, but for now investors should think twice about betting against the tide of central bank Dollars, Pounds, and perhaps increasingly Euros and Yen that are expected to keep flooding the world economy.

Will 2013 be the year in which the world really starts to emerge from the shadow of the global financial crisis? Perhaps that is too much to hope for, but there are good signs that the healing process in the global economy and markets can continue. Growth in the major developed economies is likely to remain quite subdued – slightly more robust in the USA, but still close to zero in the Eurozone.

 

The Economy 

Economic developments around the world now range from tangibly-improved in the United States, through apparently-improved in China and India, to less-bad in Europe. A return to financial markets driven by fundamentals is long overdue but first we need to consider the political ramifications of 2012 and prospects for 2013 :-

  • Risks from the Middle East are higher
    • displacement of US influence in Egypt by the Muslim Brotherhood
    • civil war in Syria
    • this clearly fragile balance of power leaves the region less stable than a year ago
  • Elections were a feature of 2012
    • two in Greece
    • France (with the arrival of a wave of socialism, which already appears to be on the wane)
    • Barrack Obama’s re-election in the US
    • Re-election of Shinzo Abe in Japan.
  • Risks from the Eurozone are lower and falling
    • It appears very likely that Angela Merkel will be re-elected in Germany
    • The Italian election, which must be held by April 2013, will determine whether the reform process Mario Monti was able to begin during his tenure continues or whether it reverses
  • The time for forgiveness is late 2013
    • The German election will likely coincide with Greece’s return to primary surplus. 
    • This could mean that Greece’s debt could only be forgiven if it defaults, and thereafter no more fiscal transfers would be possible. The appeal for the creditor countries is that it reduces the risk of political extremists gaining power and forcing the long-feared Grexit – an event which carries unquantifiable risk to the broader financial system.
  • Will profits matter more than politics?
    • The chances of markets being driven by fundamentals, rather than politics, are clearly higher for 2013 than they were for 2012.
    • I expect equities to trade according to their earnings growth.
  • In the UK, general share capital growth is expected to be positive, combined with attractive potential dividends
  • In the US, stronger earnings growth but a lower yield and a slight softening of the dollar will mean a more sedate return in sterling terms.
  • European companies seem well placed to capitalise on the region’s export performance. The modest valuation of European shares offers an attractive yield, and positive trade dynamics are supportive of further gains.
  • Japanese equities are currently heavily overbought and I expect profit taking might be in order. With the country back in recession, I expect modest total return from Japanese shares.
  • The rest of Asia, however, looks set to enjoy robust earnings growth which encourages me to think positively about the potential for strong equity returns.

Investors must clearly treat these opinions with caution, as equities are volatile. I am an advocate of asset combining to take advantage of the differing asset performance related correlations, helping to manage both risk and volatility. I believe, however, that the potential for markets to reflect fundamentally attractive valuations should give investors optimism about the prospects for 2013.

Launch of Waverley Court Consulting Ltd – Website www.waverleycc.co.uk

18 Dec

I am pleased to announce the launch of my website – http://www.waverleycc.co.uk

After much work, reviews, re-writing and editing my website is now live. Let me know your thoughts on the content, design and presentation. Personally, I am most pleased with the Testimonials sections – every one who kindly provided their comments presented their views of our relationship.

The Current Market is a Stockpicker’s Paradise

17 Dec
The best time to be able to add value to portfolio performance is during times of troubled markets. Now the markets are clearly troubled, or in crisis, or in panic, or in confusion…
A stock-picking approach is vital during these times and a strong stockpicking discipline is possibly the best way for investors to ensure their money survives the current recessionary environment.
Many industry commentators have suggested that a combination of low-interest rates and low growth is a nightmare for managers who take a bottom-up approach. Maybe more so than ever, investors need to become students of the political scene as much as the macro-economic environment. You, as investors, more than ever need to focus on a company’s fundamentals. We are clearly in unprecedented times, The Bank of England interest rate has been at 0.5% for over two years (the lowest ever in history). This is not the time to be aggressively taking on risk, I believe we have to stay defensive, and the way we do that is by being very selective about which holdings, sectors and niche markets we pick. Although, we also need to remember when to break this rule as there are opportunities – suitable asset combining is essential to manage the potential for success with a capital preservation overtone.

Stockpicking has been a style that can prosper even in the most difficult markets. 

The Launch Of My Corporate Website

11 Dec

We are almost there !!!

I expect within a few days my website will be up and available.

The official corporate Financial Services site for Welshmoneywiz is Waverley Court Consulting Ltd.