Gold suffered its worst year in 2013 since it became freely tradable in 1972, losing 26 per cent.
It has suffered recently as risk assets have risen. The last five years, the exception being 2011, have been very good for equity investors because sentiment has built up since the financial crash.
Performance of indices over 5yrs
Source: FE Analytics
Harris, who heads up a number of multi-asset funds at City Financial, is cautiously optimistic for the medium-term, but he says investors should prepare for volatility in equities over the next six to 12 months. For this reason he is buying gold and gold miners as protection.
“We are long overdue some sort of correction,” Harris said. “We have had a very good few years for equity markets, quite exceptional really, and now there is a fair bit of over-optimism.”
Although the manager agrees that the economic backdrop is looking brighter, he says that too many of his peers are getting carried away, which is making him nervous.
“Valuation re-rating has driven markets instead of earnings and in particular there does seem to be a cosy consensus that equities will continue to do well, bonds will sell off, growth will come through and there will be policy clarity.”
“For me, it is a little bit more complicated than that. Because of that, I am more cautious and so I am digging around for some contrarian plays.”
As a result, the manager has built up a decent position in gold bullion and gold miners. The former makes up around 4 per cent of his funds while the latter makes up close to 6 per cent.
The manager says that although he is more positive on gold than he was last year, his decision to buy into the precious metal is for hedging purposes, not because he thinks its price is going to soar.
“It has been an unloved trade as gold and gold miners have been very out of favour,” he said. “I do feel that I need to hedge against some of the rising tail risks in the market just in case there is any turbulence.”
Gold bullion and gold mining companies were two of the worst-hit asset classes last year.
After a decade-long bull run in gold bullion, the price of the precious metal fell off a cliff as sentiment turned more positive and concerns surrounding rampant inflation – as a result of the Fed’s money printing – subsided.
According to FE Analytics, investors in gold bullion lost close to 30 per cent last year.
As a result, the seven worst-performing IMA funds in 2013 were all gold mining portfolios. For instance, BlackRock Gold & General and Smith & Williamson Global Gold & Resources lost close to 45 per cent while MFM Junior Gold – which was the worst performing open-ended fund last year – lost a staggering 65 per cent.
Performance of funds vs index in 2013
Source: FE Analytics
Harris avoided both asset classes last year as he expected the gold price to fall back considerably. However, given the fact that gold is now at $1,255 and gold miners are so under-owned, he says they have a better chance of avoiding a further fall if equity and bond markets do correct.
“I am hoping that is the case as they could mean revert,” he said. “Sentiment is still rock-bottom as there have been huge flows out of gold ETFs. I do want something that is a form of protection. I didn’t want to put it all in gold bullion as gold mining shares are so cheap.”
The manager says that the biggest threat to the rally is miscommunication from the Fed. He is specifically focused on how it deals with quantitative easing and interest rates, because any policy error would cause markets to correct as investors would lose confidence.
Despite those worries, a number of former “permabears” have turned bullish over the past few months.
Renowned hedge fund manager Hugh Hendry and Nouriel Roubini (aka Dr Doom) have both given in and admitted that the rally in equities, for whatever reason, can continue.
This has left fund of funds managers, such as Schroders' Marcus Brookes, in a difficult position. He recently told FE Trustnet that he is struggling to find any managers that are bearish and as a result is maintaining a very high cash weighting in his Cazenove multi manager funds.
Harris agrees with Brookes and says that it does present a problem.
However, the manager is quick to point out that he doesn’t foresee a crash in financial markets, but given how far equities have come, he expects a period of consolidation.
“It is a fair comment,” Harris said. “It does feel like there are a number of bears that are now capitulating.”
“I am not arguing that it is the end of markets moving upwards, but investors are too over-optimistic at the moment. We have had some good years with equities, but I think returns will be a bit flatter this year.”
Harris joined City Financial in January 2013, having previously headed up the multi-manager team at New Star and Henderson.
According to FE Analytics, his £46m City Financial Multi Asset Balanced fund is a top-quartile performer in the IMA Mixed Investment 20%-60% Shares sector over one year with returns of 13.41 per cent.
Performance of fund vs sector over 1yr
Source: FE Analytics
Although Harris can take his equity exposure up to 60 per cent, the asset class currently only makes up 45 per cent of his portfolio.
His City Financial Multi Asset Diversified fund is the top performer in the IMA Mixed Investment 0%-35% Shares sector over the last 12 months.
Harris’s funds all require a minimum investment of £1,000 and tend to have ongoing charges figures (OCF) ranging between 2.2 and 2.5 per cent.
