Harris, who is head of City Financial’s fund of funds range, had increased his exposure to gold bullion and gold mining funds at the end of December as he was concerned that there was a “cosy consensual view” that equity markets would continue to go higher and therefore he wanted to hedge risk.Both physical gold and gold equities were deeply out of favour at the time, having had a shocking 2013 with the former losing 30 per cent and the latter losing 50 per cent.
However, Harris’s contrarian call paid off as the two asset classes bounced back in January while equities sold off on the back of concerns surrounding emerging markets growth.
Performance of indices in 2014
Source: FE Analytics
Harris has now sold his exposure as he expects the precious metal to underperform over the short-term.
“Five or six days ago, we sold down our position basically to zero,” Harris said.
“That’s not to say that I don’t think that gold can’t go any higher from here, but it has now been tactically overbought.”
“We have taken 20 to 22 per cent profits since the start of the year and put it into cash. However, if it comes back then I will take another look again.”
“It is one of those things where everyone was extremely negative on gold and all the flows were outward. We have decided to take our profits, take a step aside and re-evaluate our position.”
“However, those profits are being held in cash, so I am not widely optimistic,” he added.
The manager says that the gold price is likely to fall over the very short-term because it will be negatively correlated to equity markets.
He thinks that markets will be very stop-start in 2014 and therefore while equities could rise strongly over the next month or so, he expects them to continually sell off as valuations are already high and economies are fragile.
As a result, he says he will be looking to dip back into gold sooner rather than later.
“My view is that there is now more risk in the equity market than there has been in the past and there was this cosy consensual view that markets will keep going higher.”
“By February, equities had been quite deeply oversold and I thought it was likely that we would see another rally, which sure enough, we have seen.”
“Really, what I am looking for is for markets to push on over the next month. However, I think there will be the recognition that the weaker growth in the States wasn’t just weather related. That will be the time to buy gold again.”
“Fundamentally, it is evident that growth is improving but people are pricing in this magical mid-cycle strengthening economy. I think we will start to hear a lot of noise in the US about growth and in the emerging markets because of their credit-driven boom and bust cycle. I think economies are still very fragile.”
Harris’s gold trade has certainly benefited his investors.
Our data shows that his City Financial Multi Asset Dynamic and City Financial Multi Asset Growth funds are the second-best performers in their respective sectors since the start of the year, while his City Financial Multi Asset Balanced and City Financial Multi Asset Diversified funds both top their respective sectors.
This has contributed to the fact that all his funds are top-quartile performers since he took them over in January 2013. Harris has returned 15.5 per cent to his investors over that time while his peer group composite has made 10.29 per cent.
Performance of manager vs peers since Jan 2013
Source: FE Analytics
James de Bunsen, multi manager at Henderson, agrees with Harris, saying that gold and gold miners are unlikely to continue their recent stellar run.
“We don’t have any gold miners in our fund, they have been a very good trade so far this year but there are some absolute dogs in the sector,” he said.
“A lot of the companies are inefficiently run and are still very over-invested. It will be a long drawn out process to get them back into shape.”
“They were so unloved, so they were always going to bounce back at some stage. But they will have to bounce a lot more to make up for their recent poor performance.”
“We did increase our physical gold holding from 1 to about 1.5 per cent at the start of the year. We realised that the gold price had probably troughed at $1,200 but we are not expecting that position to drive our funds, it’s more of a hedge.”
“I don’t think the gold price is going to roar back to where it was,” he added.
De Bunsen’s views are similar to those of FE Alpha Manager Iain Stewart, who recently told FE Trustnet that he was happy to see that gold, gold miners and government bonds were once again protecting investors against equity market volatility.
However, though they acted as a hedge in the recent sell-off, de Bunsen warns that investors shouldn’t expect them to offer any sort of protection in a more serious and consequential equity market correction.
De Bunsen’s concern is that, when facing the next serious headwind, investors could react like they did in May and June last year when nearly every asset class lost value.
Performance of indices between May and June 2013
Source: FE Analytics
“I don’t think that government bonds can be counted as a hedge anymore,” he said.
“Prior to the tapering speech in May, they were the perfect asset class to hedge against equity risk, but now I think they could easily sell off at the same time as equities.”
“In fact, I think the only thing you can count on not to fall when equities do is cash and that is why we have quite a lot in our funds.”
