Prospect for Gold in 2017

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


In continuation with my macro themes for 2017, today I look at Gold and what I consider to be the best way to get exposure to the sector. Gold had an explosive start to 2016, up 30% to $1,372 from $1,061 the start of the year in $ terms to its peak just after the BREXIT vote in the summer. Since then Gold has given up much of the gains, ending 2016 at $1,173 just 7% higher than where it started. The price action has been unpredictable of late, gold traditionally does well in times of uncertainty/adversity and hence many gold analysts thought the prospect of Donald Trump in the white house would rally the yellow stuff, but no such joy.  So what are the prospects for gold in 2017, will it be a year for the gold bugs or the gold bears?

Gold, back to basics

Gold is pretty useless compared to most other commodities, it has very limited industrial application, with its key industrial use being as a conductor in precision electronic appliances. Gold’s industrial demand is very limited compared to for example copper, oil or iron. Theoretically therefore demand should be limited and the price pretty cheap, but it isn’t, Warren Buffett once famously summed up the paradox as follows:

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Gold though is a) pretty and b) relatively rare. Demand historically was driven by the very nature of these two factors. Gold also doesn’t corrode and has just one grade, adding practicalities to its repertoire, i.e. gold doesn’t lose its value and is very simplistic to value. These factors meant gold became the global standard store of value and thus used as Currency for thousands of years. For at least the first millennia this was as a physical currency, but latterly as a backing to paper currency, known as the ‘gold standard’.

The Gold Standard met its demise in the 70s though, this was largely to allow flexibility, i.e. so the growth of the money supply wasn’t restricted by how much gold could be physically dug out of the ground. This all meant that today’s modern currency is no longer backed by gold, but it is worth noting that most countries still hold some stores of gold, albeit the amounts in their vaults generally accounts for a small % of the total money supply in issue.

So whilst the role of gold in monetary policy is reduced, one thing that hasn’t changed though is gold’s cultural significance. Gold is still considered a luxury item and thus it remains a key input to expensive jewelry. So theoretically then this should be the only factor that really drives the gold price? Not so simple, even though gold is not official currency anymore, it still is a store of tangible value. Fundamentally paper is very common and thus worthless if the system is removed, this is exactly why gold does well in times of great uncertainty, as we will go on to see.

So what drives the gold price today?

One of the theoretical drivers and frequently cited reasons for gold price increases is a decline in the interest rates, since gold has no yield then theoretically an increase in base rates should decrease the appeal of gold and hence gold prices should decline. Figure 1 shows the link between US interest rates and the gold price is US$.

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Figure 1 – Gold price vs. Real Interest Rates. Source: Merk Investments

There is clearly some inverse correlation between US interest rates and gold prices, but the relationship does not always hold true. Interest rate decreases are also likely to weaken the US$ and hence make the price of gold relatively cheaper to non US buyers.

This leads me nicely on to the next driver; the strength of the US$ which is another key factor which influences the gold price, whether driven by interest rates or otherwise. The US has the largest gold reserves, over 8,000 metric tons, double the next largest holder Germany so a lot of gold buying may have been historically domestically led. However, China and Russia have been more recently been heavy buyers of gold and they would all benefit from any weakening in the US$. It is also worth noting though that a strengthening US$ provides some protection for existing overseas gold holders, in that a stronger US$ also increases the value of the holding when converted back to local currency.

Inflation is another factor than is often cited as a driver for the gold price. As inflation reduces the real value of currency then gold is seen as a way of protecting wealth. Be careful what you wish for though, periods of high inflation are usually correlated with periods of high interest rates, which as discussed above theoretically dampen the gold price.  As expected therefore there is some but not a strong correlation between the gold price and inflation.

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Figure 2 – US Inflation rates vs. Gold Price

For example, inflation rocketed to 18% in the late 70s/early 80s, but interest rates also rocketed to 20% to attempt to control the inflation. Interest rates stayed above 10% into the early 80s with the gold price collapsing over the same period!

As you can see with all of the first three factors mentioned, i.e. interest rates, inflation and US$ strength, they are all very much linked in that they all drive each other. The final economic factor I look at it is semi ‘delinked’ from the others, I use the word delinked extremely loosely, as clearly the macro drives the micro, i.e. individual stocks. The performance of the stock market is though probably the most inversely correlated to the gold price, but hold your horses! In figure 3 below you can see the performance of the S&P over the past 5 years against the performance of a physical gold ETF. The S&P500 index has risen 100% whilst the return of physical gold has been 0%. This is far from perfect inverse correlation, which would be -1, i.e. gold declining 100% (impossible). Taking a shorter time frame looking at this year though, the S&P500 has risen 18% and our physical Gold ETF has risen 6%, i.e. a somewhat positive correlation, which isn’t what it is in the textbook!

It is clear there is no perfect relationship here, in fact the longer term correlation is just -0.14, so only slightly inverse. This might not seem a lot, but when you leverage this onto producing companies the share price performance of these can potentially vastly outperform, but more on this later.

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Figure 3 – S&P500 Index vs. Physical Gold ETF. Source: Google Finance

As a final analysis let’s take a look in Figure 4 at how gold performed in the last financial crisis, overall gold rose 60% during 2008-2010 against a 20% decline in the S&P500. In this crash gold did provide some protection, but perhaps not just as a result of the general fear and uncertainty. Over the same period interest rates also declined, which as we discussed earlier make holding gold more attractive.

Another observation to note is that a popular ETF which tracks the major gold miners only rose 30% against the gold price rise of 60%. This goes against the common advice of ‘buy the miners not the commodity’. At the peak of the crisis, late 2008 the gold miner sell off was actually even more intense than the broader S&P500. One of the key reasons for this was indiscriminate selling in an environment of extreme fear. However, if you had bought the ETF gold miner index in late 2008 you would have returned around 80% to the close of 2010. Timing was key in this period!

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Figure 4 – S&P500 vs Physical Gold vs Gold Miners. Source: Google Finance

In summary, there are many drivers to the gold price and it is not as simple as looking at one variable and buying gold on that basis. It is not even sound advice to blindly load up on gold to protect against stock market declines. I am still of the view that gold does have a place in a balanced portfolio, but one should broadly consider the environment and carefully consider the weighting.

So what are the prospects for gold in 2017?

The following chart shows real gold prices over the last 100 years, we are some way off the two most recent peaks but even further from the recent trough.

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Figure 4 – Real (inflation adjusted) Gold Prices. Source MacroTrends.Net

I’m not going to perform any detailed analysis here, a) I’m not qualified to do so and b) you can find predictions from so called experts from around $200 to $10,000. The truth is that given the number of variables it is very complicated. However, looking at the drivers, some very quick thoughts.

  1. Inflation – picking up in many core economies.
  2. Interest Rates – picking up in USA and we may see this trend continue among other major economies later in 2017.
  3. US$ – Likely to continue strength.
  4. Stock Market – Markets are fairly fully valued but global growth prospects looks reasonable. But where is the next black swan?

All in all, I believe the strong US$, Interest Rates and Inflation are already priced in to gold and thus the key drivers may be driven more by geopolitics. There is also the European Union and how Trump settles into the White house to consider. My personal view is that gold can offer some downside protection against these events. There is also a potential major new demand source for gold. I won’t go into that here but take a look here at the Sharia Gold Standard over at ZeroHedge.com

How can I get exposure to gold?

There are many funds and ETFs which allow exposure to gold, these include through physical holdings, derivatives and the underlying producers. As a general rule I never invest in physical commodities or the derivative methods, the former is expensive and the later you need to deal with Contango (I’ll cover this in a separate piece). I prefer holding the underlying miners, i.e. investing in real businesses. In times of high gold prices, much of any price increase goes to the bottom line and producers can theoretically also work to minimise costs thus increasing the margins. You can see in figure 5 below that during the peak bull run of 2016 the gold price had increased 30% since the start of the year and hence the ETFS physical Gold ETF delivered a similar increase, however one ETF tracking the gold miners  increased 160% during the same period. However, as mentioned above this didn’t hold true in 2008/2009 stock market crash, initially at least.

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Figure 5 – Performance of Gold Vehicles 2015/2016. Source: Google Finance


Should I go Active or Passive?

There are limited fund/trust options for active management. The most obvious active fund is the BlackRock Gold and General (BRGG) Unit trust, this performs well but the broker management fees are not included in the above chart (0.45% per annum for Hargreaves Lansdown) and the performance differential is not enough for me to give up the instant liquidity that come with exchange traded products.  That said BRGG remains an excellent choice for those investing in smaller tranches.

The two ETFs I like in the sector are the Vaneck Junior Gold ETF (GDXJ) which fully replicates the Market Vectors Global Junior Gold Miners Index and the Vaneck Gold Miners ETF (GDX) which replicates the NYSE Arca Gold Miners Index, an index representing the larger gold miners. The performance has been interesting this year, with the junior miner index, represented by the green line in figure 5 outperforming in 2015 during a period of weakness in gold price but also in 2016 during a period of better prices. The other lines on the chart are the performance of Physical Gold ETF (yellow) and the popular BlackRock Gold and General Unit Trust (brown).

Let’s take a look at the fundamentals, the Price Earnings (PE) ratio of GDX is 44, which is expensive. After a good year for many miners the forward PE drops though, for Randgold the 2017 PE is expected to be 23. Further it is important to note the effect of even modest increaes on the gold price, ‘GDX’s top 17 component gold miners had average All in Sustainable Cost [AISCs] of $936, while the next 17 looked even better averaging $857.’ According to Analyst Adam Hamilton. This gives a margin of around 17% against a current gold price of $1,100. If the gold price hits a sustainable level of $1,300 then the margin is 38%. Major miners would be on P/E ratios at current share price of less than 10. A very attractive prospect. Moving on to the junior index ETF, the P/E of GDXJ is -24, this is mainly as the companies tracked are at an earlier stage of their life and may be explorers as well as smaller producers. The Price/Book ratio is just 1.24 though which is reasonable and suggests plenty of room for growth.

The key risk is a lower gold price throughout 17, a fall of the gold price towards $900 would wipe out earnings and some miners would be loss making. The pain in the junior miners may be more significant with some exploration/appraisal prospects likely to be canned.

SUMMARY

Authors opinion – Buy Gold, on balance I see more bullish indicators than bearish.

Overall I like to have between 5%-20% of my portfolio in Gold depending on my view of the world. I’m currently planning on going into 2017 around about 7% and may look to increase this on weakness and/or geopolitical concerns and a bearish stock market.

GDX/GDXJ are both good ways to get exposure to the sector and you could consider a holding in each.

Disclaimer – I have no positions in any of the stocks mentioned. ShareInvestors.co.uk requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

Are UK Smaller Companies still investable?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


I continue today with my portfolio review ahead of the dawn of 2017. As I wrote about previously, as well picking out individual contrarian stocks I also like to focus on Macro themes and getting exposure to these through ETFs and quality Investment Trusts. I find this strategy allows me to make money by getting it right at a Macro level even if I make a few mistakes at a Micro level. Today’s focus is on UK listed Smaller companies, it’s an area I love and where I place most of own money when it comes to individual stocks. But after a bull run is this area still hot for growth and what is the best way to get exposure?

The Macro Picture for UK Smaller Companies

Ultimately a small company is tomorrow’s big company, so no matter what is going on in the broader macro environment there is always lots of potential in this area. The small company definition is fairly broad though and for investment trusts the selection criteria for companies to place their capital can be a market capitalisation of anything between £50m and £3bn.

As I discussed in my post last week on Vietnam opportunities, there are certain sectors that are for stock pickers rather than ETFs, which tend to track indexes. Smaller companies is another sector where active management is essential in my opinion. Smaller companies are inherently more risky, they tend to have more limited access to resources, this is financial capital but also human capital, i.e. experienced people. Smaller companies may also be earlier in the development cycle or more likely to be pursuing growth, which again makes them inherently more risky than their larger cap brethren.  All this means failure rates are higher and consequently you need to be able to accept volatility in this sector.

The sector though is also full of promise for those with the eye. Overall the sector is relatively poorly researched too, in fact many smaller companies have no independent research published on them at all, so for a skilled asset manager there are massive opportunities for returns. Given the risks it is essential though to throughly research stocks and if possible look the management in the whites of the eyes.

What are the potential HeadWinds and Tailwinds for 2017 for the small company sector?

Always a tough assessment. Economic contraction is a risk to all stocks, but given the general restriction in capital that smaller companies have the risk is magnified in this sector. Bank’s lending books really dry up during times of toil. No surprise then that in the last major economic crisis of 2008, the smaller stocks were consequently hammered. The FTSE All share overall shed 45% value from peak to trough, the AIM All share 65% – see Figure 1.

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Figure 1 – Performance of AIM All Share vs. FSTE All Share in 2008 crash. Source: Google Finance.

So are we due another shock? I personally don’t like to plan for potential black swan events, it has been 8 years since the last financial crisis so I admit perhaps we are due one. However, equities over the long term deliver 7% a year, so by parking money in cash since 2008 waiting for the next black swan you would be giving up 72% of gains over the same 8 year period. My preferred strategy is therefore to keep 10%-30% of my portfolio in cash to buy into dips and leverage up when I see extreme buying opportunities. Given where we are in the cycle I am holding the upper end of the above range in cash and I’m certainly not thinking about leverage.

I’m not going to go into a full analysis of all the macro risks, but a flavour of what the ‘known unknowns’ are, just for fun. You need to look to the US, Russia, Europe and China in general, these are the only players that can really trigger an economic crisis. If any of these sneeze Britain will catch the cold. The biggest risks I see are slowing Chinese growth and the consequent credit bubble bursting, Donald Trump (catch all), Putin aggression and further pressure on the European project. As for the ‘unknown unknowns’, aliens landing in piccadilly circus…

What about Brexit?

This homegrown risk is a more tangible risk, but only just. Smaller companies tend to be more domestic led, therefore theoretically less vulnerable to the FX risks and new complexities of overseas trading that Brexit may bring. However, clearly the domestic economy is linked to the broader economy, it would be naive to suggest otherwise. On the flipside, a Brexit could also make doing business in the UK easier given the reduction in EU regulations to contend with.

I think at this stage though there are far too many variables to consider to ‘call’ this whole sector on the brexit factor. It will though for sure affect some companies more than others, exporters may be quids in but importers may struggle, this goes back to the importance of choosing a solid asset manager who can pick the right stocks…

So how can I get exposure to the UK Small Cap Scene? 

There are 100s of funds, trusts and ETFs covering the sector. It is essential that you do your own research to find the right fund for your circumstances. My favourite though in the sector is Standard Life UK Smaller Companies Trust (SLS). This trust has performed exceptionally well over the last 10 years (Figure 2), an investment in December 2006 would have returned you 200%, against 10% decline for the AIM100 and relatively flat performances for the Numis SmallCo Index and the FTSE100.

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Figure 2 – 10 year SLS performance vs. benchmark. Source – Interactive Data

Performance has been weaker this year (Figure 3) though, down 12% against the AIM100 benchmark. One of the drivers for the weak performance is the same reason for its outperformance over a longer horizon, the lack of exposure to resources sector. As a result the share price discount to the Net Assets has slipped to 7%, above the longer term discount of 5%. I have a lot of belief in the asset manager Harry Nimmo though and his long term track record is very good. I expect he may look to add in the resources sector as we enter 2017.

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Figure 3 – 2016 SLS performance vs Benchmark. Source – Interactive Data

Another key factor for me is the size of the fund, £288m as at 23rd December. This makes it reasonably sized and thus able to operate relatively nimbly in the small cap area. As a result the trust is able to focus on a relatively small number of holdings, around 60. The trust also concentrates 56% of it’s NAV in it’s top 20 (figure 4). This means the asset manager Harry Nimmo can understand the companies inside out. The risk of funds getting too large is they end up having to take lots of positions, the Black Rock Small Cap Trust is a good example, it is double the size at £0.5bn and has 160 holdings. How can the asset manager keep track of this many holdings? Trusts can be often be victim of their own success, but as a shareholder I want the success to be returned to me via special dividends rather than through new investments in this sector. This keeps the trust nimble and hopefully performing well.

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Figure 4 – Top 20 SLS Investments. Source: Standard Life

Final comment, the trust has exposure to AIM micro caps all the way to FTSE250 (Figure 5). This is a sensible weighting given the potential uncertain times we are entering.

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Figure 5 – Composition of SLS. Source: Standard Life


Summary

Author Opinion – Positive on Sector / Positive on SLS Trust

Over the long term I expect the UK small company sector to continue to flourish, for as long as we have a government that is pro business. The SLS trust is an excellent way to get exposure, whilst 2015 has been a disappointing year I have confidence in the long term track record of Harry Nimmo.

Disclaimer – I have no positions in this stock. ShareInvestors.co.uk requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

When will the corporate bond bull market burst?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


 

I have a three different investing strategies, all with fundamentals at that their core. One of my investing strategies focuses on macro trends, i.e. looking at what I believe to be under valued asset classes, sectors and currencies on fundamentals. I then pick appropriate ETFs and Investment trusts to get exposure to these areas.

In today’s post I look at the sterling corporate bond asset class and specifically at the iShares Core Sterling Corporate Bond fund (SLXX). Corporate bonds have been on a bull run since 2009, well actually you might argue the run has been in play since 1980. My favourite in the Sterling Corporate Bond sector, iShares Core £ Corp Bond (SLXX) had seen 45% capital gain alone from mid-2009 to the most recent peak in the market at August 2016. When you add distributions over the same period you can add a further 30% on top. This is a whopping 85% return in 7 years, these are equity like returns.

Firstly, how can I gain exposure to Sterling Corporate Bond?

As above my favourite in the sector is SLXX, the fund is an Exchange Traded Fund (ETF) which tracks the Markit iBoxx GBP Liquid Corporates Large Cap Index. This is an index of large cap, liquid, investment grade bond issues. At 8,000 issues it is also very well diversified. It is therefore a great way of getting exposure the to corporate bond asset class at large. It is also worth mentioning that with an average maturity of 14 years it gives a longer dated exposure to bonds, this becomes relevant later.

As mentioned above the fund has done very well and performed well ahead of the sector and a similar mutual fund offering from BlackRock (see figure 1). The total expense ratio (TER) is 0.2%, higher than BlackRock corporate bond tracker which Hargreaves Lansdown can offer at 0.12% TER. However many fund brokers such as HL also include a management fee on mutual funds, for HL this is 0.45%, so the true cost of this could be upto 0.57%. This of course depends on your circumstances and also bear in mind dealing fees with ETF. I’ll do a separate piece at some point discussing the pros and cons of different ‘wrappers’ for your investment.

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Figure 1 – SLXX vs Sector and Peer. Source – Financial Express

Anyway, not much more to say on SLXX, it’s an ETF. You can access this asset class in many ways, the important factor is the macro picture though…

So can the corporate bond bull market continue?

Let’s start with the basics. There is a an inverse relationship between Corporate bond prices and the yield. The demand and hence the price of corporate bonds are solely a function of risk (represented by yield), and this can be subdivided into two factors:

  1. Interest Rate Risk – Relative yield of corporate bonds versus other asset classes, most notably cash.
  2. Credit Risk – Real or perceived Counterparty risk .

Is the yield on corporate debt now too low? Are we consequently due a fall in bond prices?

The yields on sterling corporate debt hit a record low earlier this year. A major factor behind this is the ongoing quantitative easing, where the central bank buys investment grade corporate bonds, among other assets. The logic here is that by buying bonds this increases the price, reduces the yield and hence the cost of corporate borrowing. This should theoretically stimulate the economy. Some argue though this action from the central bank distorts the yield and doesn’t fairly represent the risk of holding corporate bonds. Taking our fund from above, the current average Yield to Maturity (YTM) of SLXX is 2.77%, this compares to an Weighted average coupon (WAC) rate of 5.09%. This means the average bond in the SLXX fund is yielding around 1.4% less than the underlying coupon rate of the bond. This means the bonds held by SLXX are trading at a premium to issue price, a 26% premium to be precise, as at 16th December 2016.

This premium sounds extreme but a yield of 2.77%, despite being well below the coupon on the bonds is still significantly more than you can hope to achieve by parking your money in cash. But what about a Sub Investment Grade Emerging Market Bond Fund? The iShares WING fund has a current YTN here of 4.86%. But this sounds high a risk fund right, but a yield of less than 5%? Would you lend your money at this rate? Do you feel more comfortable with 7.5%, or perhaps even 10%? A yield requirement of 7.5% or 10% would represents a 16% or 29% underlying decrease to the price of the bonds. I am very concerned about counterparty risk on ‘high’ yield corporate bonds, default rates of 5-6% would not be uncommon in any economic downturn, this would start to seriously affect the returns of bond investors and could trigger a flight to safety. Investment grade bonds are unlikely to have the same counterparty risks but may be dragged down in association.

Now let’s look at the second risk, interest rate risk. A major factor causing people to turn off from investment grade bonds is potential yield from elsewhere such as increasing interest rates on cash…

Are UK interest rates likely to rise?

As mentioned above the price of bonds are very sensitive to interest rate increases. A hypothetical scenario but if the interest rate for cash increased to 3% then given SLXX and similar bond funds only offer a YTM of 2.7% then a rational investor would sell SLXX as cash is zero risk and has more liquidity than bonds.

We are a long way from 3% base rate though granted. We are in an era of ultra low interest rates, it’s been that way since the 2008 financial crisis and the general trend has been down since the late 70s (see figure 2). Whilst 3% base rate is unrealistic in the near term the current interest rate is 0.25%, so there is also very little potential for further decreases and therefore upside to bond prices from this factor.

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Figure 2

What is the likely trajectory for base rates from here?

Interest rates are a monetary policy tool to control an overheating economy, one where inflation is running high. The collapse in Sterling post Brexit is starting to impact inflation given we import a lot of raw materials and a lot of the food we eat.  Could this force the MPC to increase rates? The risk is currently considered low, current predictions are that interest rates won’t make it to 0.5% until 2021. But since when did the experts get it right?

If interest rates do rise then longer dated bonds are likely to be much more sensitive, this is for the simple reason of longer exposure to the narrower spread between base and current yield. A shorted dated ETF such as iShares £ Corp Bond 0-5yr UCITS ETF (IS15) may be safer, but for obvious reasons the current yield is much lower.

SUMMARY

Sell

I am not saying the next bubble to burst will be corporate bonds, I just see very little upside from here and on balance more potential downside so this comes down to risk/reward ratio for me. Interest rates increases are unlikely in the near term, but then so was BREXIT and Trump for president.

Disclaimer – I have no positions in any of the stocks mentioned. To my knowledge no close family, friends nor associates have any further position. 

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

AIM – 20 years of poor returns

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


This summer has been a good one for many penny stock pickers on AIM. Some of the recent success stories include Cloudtag (CTAG), which has delivered 760% YTD, Sirius Minerals (SXX) 128% and Canadian Overseas Petroleum (COPL) 442%. So is AIM really delivering astronomical growth for investors or are these outliers?

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The total return of the AIM All share index is shown above, by way of illustration if you had bought the index in summer 1999 you would be sitting on a 25% loss. Much worse would be If you had bought it at the height of the ‘dotcom insanity’ you would today be nursing around a 70% loss. Over the complete life of AIM, since launch in 1995 the average annualised loss is -1.5% and according to the FT, investors have lost money on 1 in 7 companies listed in AIM.

This is a woeful performance, especially when you consider the FTSE250 has delivered 200% over the same period.

Are there any lessons to be learnt?

AIM describes itself as ‘AIM is the most successful growth market in the world’. For who exactly? Overpaid boards presiding over value destruction? EC1? The Brokers, Nomads, PR firms, lawyers and transaction teams who bring often poorly suited companies to market? The AIM market has no doubt lined the markets of these advisors but has the AIM market been successful for investors? No, the facts speak for themselves.

To make things worse the AIM market is a magnet for retail investors, dreaming of the willy wonka ticket. The paradox is that these investors are the most poorly suited to these types of investments, a short visit to the bulletin boards shows you the real heartache behind ‘the most successful growth market’ where retail investors have suffered huge losses, e.g. Gulf Keystone, xCite Energy to name but a few. Stories of investors on these boards losing their life savings are all too common.

You might have no sympathy, it would be stupid though to put all your eggs in one basket right? True, but it is way too easy for someone with no financial or business acumen to buy into AIM companies. A cruise through LSE bulletin boards shows that the average investor is very misinformed, just the other day, one punter was ‘hoping for a share consolidation 10:1, to make us all rich’. This person genuinely expected his wealth to increase by 10x, little did he understand that this yes the share price would increase by 10x, but the number of shares he would own would decrease by 10x. It’s little reason why the AIM market is nicknamed a ‘casino’.

For me, I strongly believe private investors should not be allowed to trade AIM shares without the brokers doing proper due diligence on their punters.

Is there a silver lining?

You can make some serious returns on AIM. ASOS is the story is everyone knows, investing £1,000 at IPO in 2001 would have returned you £162,130. AIM is a stock pickers market and thus the phrase banded about by retail investors is ‘Do your own research’. But does the average investor really know what stock research is? Do they understand that a companies fair value is the present value of future cashflows? I therefore strongly advise retail investors without a financial or business background to seek a strong financial qualification before touching an AIM share, a CFA qualification would stand you in good stead to understand what to invest in, or at least develop some understanding of risk management.

Good luck!