Investment Club: Paper-and-pencil analysis proves as effective as big firms’ expensive predictions

LAST month the Investment Club’s unit price smashed through the £3 barrier for the first time in its history, achieving a third consecutive month all-time high of £3.07.

This run of successive highs has been made possible by one of the financial figures I have maligned most: Ben Bernanke, chairman of the US Federal Reserve. I called him “Bonkers Ben” when I feared he would indulge in a third round of quantitative easing. But sense prevailed and no further printing of money has been condoned since QE2 ended in June encouraging higher bond prices.

The club has used War Loan as a substitute measure of health at the long end of UK gilts since the Financial Times stopped calculating its gilts index. From June to 10 August, when the Fed chairman announced that US interest rates would stay low until mid-2013, War Loan rose from £75.95 to £84.26. It continued to rise after this stimulus to £88.19 by 21 September when a $400 billion Twist programme was confirmed by Bernanke.

The Investment Club’s raison d’être is to show that results can be just as good when you use a simple pencil and paper analysis as when big firms use the latest financial computing software.

A case in point came to light inside the financial pages of a national newspaper last month under the heading “Should you sack your fund manager?”.

One of the “ditch your fund manager” recommendations relevant to us was for Standard Life’s UK Equity High Income fund. In spite of the millions Standard Life spends on fund managers, software and IT support for this fund, it basically behaves like a tracker because of its investment profile.

The club, with its paper and pencil analysis, has trounced this fund’s return on capital. The closet tracker lost about 10 per cent in value last year, whereas we gained about 12 per cent.

Is the club cooing over its David v Goliath victory? That would be nice, but unfortunately past performance is no guide to future returns. In reality, asset values could rise and tracker funds might rocket, leaving the club fighting for survival.

However, the club’s contention remains valid. Thus far we are doing no worse with our do-it-yourself, no-cost fund management, while hundreds are paying huge charges for doing no better than us.

To stay ahead of the pack, this month the club’s analysis says that if War Stock prices fall below £90, sell and lock in some profits because we will be entering a consolidation phase. Investors will be waiting to see if Sir Mervyn’s QE2 ignites inflation or, will GDP drop enough to neutralise his madness.