James Burns: Is the smart money with gold or equities?

BY THE middle of last month the phrase “things could be worse” in relation to the Investment Club came to mind.

It occurred to me because since the club came out of government debt it has been spectacularly unsuccessful in its equity investment performance. However, last month April’s unit price climbed the first increase in four months. By mid-May the club’s share selection was doing so well that we’d almost wiped out all the losses of the last four months.

While our holding of Aviva and Afren were not showing a profit they were only just in the red zone. But our holdings in First Group and Scottish & Southern Energy (SSE) were doing very well, making up for any small losses made on Aviva and Afren, closing the gap on our under-performance so things could be worse. Then, in an instant, it all went horribly wrong. Last month the club’s unit price plunged 34p to £2.59.

On 20 May, 2013 First Group came out with horrible trading figures with full year profits down 36.5 per cent, revealing that to conserve cash no final dividend is to be paid. To shore up their finances they 
announced a three-for-two rights issue at 85p a share. That was the announcement that tore the heart out of the share price, which dropped 30 per cent.

But markets, too, were on the turn, with the FTSE peaking at 6,840 a couple of days later on 22 May, 2013. It subsequently dropped to an end-of-month reading of 6,583, taking our other star performing share – SSE – down with it. After reaching £16.76 on 21 May, 2013 SSE plummeted to £15.54 by close of business on 31 May, 2013. The club immediately eliminated all its trading positions to try and mitigate any further misfortune. Therefore, the club is completely liquid.

But our raison d’être is investing, so where to invest? Unfortunately, there is no current consensus in the financial world about where to invest as all markets are giving conflicting signals. For instance, is gold where we should be investing? If bonds were the measure you were citing as reason to invest in gold you would be correct. Because bonds have fallen quite dramatically in May – even catching out the large hedge and bond funds like Man Group and Pimlico – suggesting that inflation is on the rise so the natural defence is gold. But gold has fallen 22 per cent since its recent peak on 4 October, 2012 of £1,791 an ounce.

Equities have risen about 13.5 per cent in 2013 in spite of bond yields increasing by about 3 per cent in the same time frame. However, if Federal Reserve chairman Ben Bernanke switches off the gravy train of quantitative easing (QE) bond yields will keep rising, then higher interest rates are going to put the brakes on growth in the economy. That translates into lower profits for companies, causing falling dividends that will be reflected in lower share prices as is happening now. This will throw economies into reverse and bonds will be worth buying again. We will have come full circle with the club buying back into gilts.

As this will be the final Investment Club report we will not share the outcome, but I hope those who have read the reports occasionally will have been able to relate to the club’s investment travails from your own investing experience. The club would like to wish you profitable investing in the future.