Steady profits in rocky markets
By
Tim Price Feb 13, 2008
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Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Tim Price, director of investment, PFP Wealth Management
Whether or not a rogue trader at a French bank caused last week’s panic in the markets, the US economy faces a painful period of adjustment as the era of easy credit unwinds.
UK investors are in no position to gloat because prices in our own housing market over the last decade appreciated much further than those in North America. As a result, our own financial infrastructure – now that the bubble has burst – is no better off.
Equity markets may represent value, but there is a good chance that the US will drag much of the world towards recession – stocks are cheap for a reason.
With economic prospects uncertain, I value investment approaches that are less dependent on a sustained bull market for stocks. I am particularly interested in three areas: hedge funds, precious metals, and agricultural commodities. While I accept that commodities markets are increasingly popular, I also suspect that many institutional investors are yet to join the party. Hedge funds, while not a discrete asset class, offer the potential for absolute returns irrespective of market direction – particularly those that trade in markets other than equities.
A limited number of hedge funds are listed on the London Stock Exchange, and even fewer have a track record that makes them worth considering. BH Macro Limited (BHMG) is one. BH Macro is a feeder fund for the Brevan Howard Master Fund, which trades in the “global macro” space, covering strategies using fixed income, currencies and commodities markets – the space that George Soros occupied when he helped force sterling out of the Exchange Rate Mechanism in 1992.
BH Macro is a single manager fund, as opposed to a fund of funds, so it comes with a higher degree of manager risk – but then it also avoids the extra layer of fees that comes with a fund of funds. By the end of November last year, from launch in March, the sterling share class had delivered a 19.75% return in net asset value, after fees. With markets set to remain volatile, BH Macro has, I think, a good chance of delivering meaningful returns.
Precious metals (notably gold, silver, platinum and palladium) interest me for two reasons. Firstly, they tend to be less correlated to the stockmarket. Secondly – and perhaps more importantly – they represent a store of value in a world awash with fiat paper currencies of dubious value. Our world is also awash with financial sector stress. For these reasons, notwithstanding the surge it has already enjoyed, I still like gold – the ultimate in armageddon insurance.
My preferred vehicle is Lyxor Gold Bullion Securities (GBSS) – an exchange-traded fund that tracks the gold price, and offers exposure to allocated gold in HSBC or sub-custodian vaults in London. It also comes in a USD class, but GBSS is denominated in sterling.
Given the continued growth of emerging market wealth, rising demand for foodstuffs and constrained supply, and the possibility of climate change affecting crops, wheat looks like a potentially profitable play. I favour ETFS Wheat (WEAT), an exchange-traded commodity fund that tracks a wheat price index without the need to worry about taking physical delivery. WEAT is denominated in US dollars, but – at least for the medium term – I see foreign exchange trends favouring the US dollar over sterling. I own each of these instruments.
The stocks Tim Price likes
Stock, 12mth high, 12mth low, Now
BH Macro Limited, 1,485p, 1,003p, 1,485p
Lyxor Gold Bullion Sc’ts, 3,730p, 4,578p, 4,562p
ETFS Wheat, USD5.52, USD2.52, USD5.18
Tim Price is Director of Investment at PFP Wealth Management. He also edits The Price Report investment newsletter.
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