Canvassing friends from a lifetime in the investment business in Europe and in North America, I’m struck by the unanimity of pessimism — and of mystification as to why markets have yet to collapse even more than they have so far. Debt, deflation, geopolitical tension and the uncertainties of Brexit are all with us, yet markets are quite resilient. What does the brave or not-so-brave private investor do in such worrying times?
I have in mind here the many who manage their own Sipps (Self-invested personal pensions) and are reluctant to depend on the large pooled funds that some Sipp providers use to keep administration charges down. What follows are a selection of ideas that the more independent-minded Sipp manager might wish to investigate.
The general gloom about markets was not dispelled, by the way, in a recent lecture I attended by the UK government’s former chief scientific adviser, Sir John Beddington. He gave a litany of uncomfortable predictions for the next 30 years, including population growth of 2.4 billion, requiring an increase of more than 50 per cent in food production and fresh water resources, and of more than 80 per cent in energy. He talked too about the reducing efficacy of drugs. But he also conceded that human beings have a remarkable ability to respond to disaster scenarios. And that set me to thinking about investment themes that will long outlive current turbulence.
Take gene editing and genomics, an area of scientific enquiry that has exploded in intensity and activity over the last five years. Beddington believes that there are bound to be innovations in this field that will be able to save populations from starvation and disease. The race to find new antibiotics before the existing ones lose their efficacy is another area where substantial gains are possible. In the energy sector, developments in battery storage technology could make ‘renewables’ more viable — helping to make a long-term reality of the carbonless future that governments promise.
But most investors, in Sipps or otherwise, lack the knowledge to pick small-company winners in these esoteric fields. For the curious but cautious, specialist investment trusts offer a relatively safe way to gain exposure. For the bold, here also are a couple of company stocks that play to similar themes — plus some thoughts on that old favourite for troubled times: gold.
International Biotechnology Trust
(£4.25; market capitalisation £166 million)
This well-regarded trust is currently selling at a significant discount to its recently published asset value of £5.05 per share. With just under 80 per cent of its portfolio in North American quoted and unquoted companies, it offers an ideal way to obtain exposure to many more companies in this sector than can be found in Europe, but through a London-quoted vehicle.
Polar Capital Technology Trust
(£5.52; mkt cap £738 million)
This trust covers most areas of technology including semiconductors, internet services and software, electronic components, communications, and IT services. Selling at just below its asset value — which has hardly moved over the last year — it is definitely one for the long term. So if you’re a short-term investor, you might wish to monitor the share price and wait for a discount of, say, 10 per cent to asset value to appear before you take a stake.
Polar Capital Global Healthcare Growth and Income Trust
(£1.61; mkt cap £195 million)
This trust looks like fair value, selling at a 10 per cent discount to asset value. It is invested in the major drug and pharmaceutical companies throughout the world, but also in a sprinkling of the smaller ones where the real excitements are likely to spring from.
(Can$2.35; mkt cap £185 million) •
A rarity in the mineral sector, having actual production (not just reserves) of a commodity, lithium, that is much needed for battery-powered electric motors. The Olaroz deposit in Argentina is where the lithium originates; tax changes there are perhaps one reason for a recent recovery of the shares. Another reason for thinking this bandwagon might be worth joining is the fact that every major battery maker in the world, including Californian electric car-builder Tesla, is knocking at Orocobre’s door: the price of lithium has doubled in the last year. The company also produces Borax for ceramics and agriculture, for which annual demand is growing at about 5 per cent.
Rio Tinto Group
(£19.88; mkt cap £28.2 billion)
For the contrarian long-term investor… mining analysts believe the supply side of most commodities has yet to be cut back hard enough in the face of falling demand. Hence their reluctance to recommend shares even of giants such as Rio Tinto which really have to survive to provide the world with the necessary iron ore, copper and aluminium in future. Resource stocks by their nature are cyclical. This one (along with Billiton, Glencore, Anglo American and Vedanta) has had a hard five years, with its stock falling from around £45 to £17, and the bottom of this cycle may yet be ahead of us; but we’re getting close, and a quality company such as Rio will be a leader in the recovery.
Amid all this financial and political turmoil, it would be remiss of me to omit the traditional haven of gold. Readers in London might do worse than take a stroll down Piccadilly and talk to Sharps Pixley, which has opened a shop that will sell you precious coins or gold bars. If you prefer someone else to choose your gold investments, a large, low-risk vehicle such as the Trojan Fund might appeal. But again for the bold, here are two producing companies with different credentials, but both with plenty of potential to benefit disproportionately from any rise in the gold price.
(6.85p Mkt Cap £227 million) •
This is already one of Russia’s largest gold producers, with the capacity to expand. But it came near to extinction about a year ago and had to refinance through a massively discounted rights issue at around 5p. At $600 million, debt is still a problem but cash flow will enable it to be paid down over the next few years. This is therefore a highly leveraged play on the gold price — as well as on the rouble/US dollar exchange rate.
(87p Mkt Cap. £977 million) •
With its main mine in Egypt, this company sets an example to many by having substantial positive cash flow and, crucially, no debt. It hopes to produce more than 400,000 ounces in 2017 at a cost of between $600 and $900 per ounce. But as with Petropavlosk, there is always a political risk to be considered.