Diversify to defend your wealth
In times like these, when economies are fragile and the root causes of the financial crisis remain unresolved, it's important to hold a diversified portfolio, says professional investor Mike Turner. Here, he suggests three investments to start with.
Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Mike Turner, manager of the Aberdeen Multi-Asset Fund.
The Greek debt crisis and the weak financial position of many developed countries have served as a reminder that the root causes of the global financial crisis remain unresolved. In such a fragile environment it is important to construct a diversified portfolio of investments from a range of asset classes.
The first investment I'd highlight is shares in Centrica (LSE: CNA), trading as British Gas, a leading supplier of energy to UK households. Following its acquisition in 2009 of Venture Production and a stake in British Energy, the firm's strategic balance has improved a lot. It now has a far greater upstream exposure to its own energy supply, something the market has only just started to reward it for.
British Gas's network of service engineers provides it with a competitive advantage against its peers, helping it to improve profitability and reduce churn. In addition, the company has a number of interesting avenues for growth, including operations in the United States, gas storage and further investment in renewables, which will also help to drive earnings. The shares have a healthy yield of 4.5% and are attractively valued on around 12 times 2010 earnings.
Many firms have made progress in restructuring and reducing debt. One such is Countrywide, Britain's largest estate agent with around a 10% market share. It was taken private by Apollo in a leveraged buyout deal in early 2007. Since then the UK housing market has suffered a dramatic fall in prices and transaction volumes. The housing slump saw earnings deteriorate as revenues halved to historical lows by the first quarter of 2009.
Countrywide was forced to announce a scheme of arrangement by which the majority of debt holders eventually agreed to reduce the £640m of debt in return for £175m of new bonds and £75m of equity last June. The recapitalisation has given it time to cut back its cost base and wait for the housing market to return to normality. It now generates healthy cash flow and is gaining market share as small operators fall away.
The recovery in house prices and market turnover has been gradual, as volumes are being held back by a restrictive mortgage market, high unemployment, lack of supply and an anaemic outlook for the economy. Yet the firm itself is in a much healthier financial position and we believe its prospects are better. So its Castle Holdco 10% 05/08/18 bonds, yielding 10%, look attractive.
Finally, I remain a big fan of gold, traded via a Gold ETF (LSE: GBS). Some argue it's expensive at around $1,200 per ounce, but in real terms it's still trading below its 1979-1980 level. I believe it could reach $2,000 over the next five years.
No one really knows the long-term consequences of the huge stimulus packages started last year to rescue the global economy from deflation and depression. A real risk is inflation and gold remains one of the best insurance policies against this threat. Equally, if deflation prevails this brings into question the soundness of fiat money, in particular currencies such as the euro. Gold represents the best protection against that prospect too. Central banks, notably in emerging markets, are only just beginning to increase their gold exposure as they look to diversify away from US Treasuries and the dollar.