Harris, who heads City Financial’s funds of funds range, established a decent position in gold bullion and gold miners at the start of the year to defend his portfolios against increasing over-optimism and borderline euphoria in equity markets. That decision paid off but and the manager took profits from those gains. However, he says a buying opportunity has once again opened up.
“We had bought gold and gold miners at the start of the year and we made a lot of money from them. Despite that, we have just started to build a position in gold equities again,” Harris said.
Having been one of the worst performing areas of the market last year – as a result of the increased appetite for risk among investors and the falling gold price – gold mining funds have performed well so far in 2014.
Our data shows, for instance, that the average gold fund in the IMA universe lost more than 50 per cent in 2013 as the gold price fell 30 per cent. As a point of comparison, the MSCI AC World index returned more than 20 per cent last year.
Performance of composite portfolio vs indices in 2013
Source: FE Analytics
However, due to macroeconomic headwinds such as turmoil in the emerging markets and the crisis in the Crimea, gold shares bounced considerably at the start of the year.
Nevertheless, as the graph below shows, the performance of gold mining funds have, once again, tailed off over recent months
Performance of composite portfolio vs indices in 2014
Source: FE Analytics
Harris says investors should be using this period of relative weakness to buy into the market.
“Gold miners are now actually cheaper; relative to the gold price itself, than they were at the start of the year,” he said.
“Obviously, one of the reasons we have wanted to build our exposure again is because of geo-political risk, but there is also a bit of asymmetry going on here.”
“That is because seemingly all the bad news is now in the price and so if there is any positive news then they will surprise on the upside,” he added.
While Harris has been re-establishing a position in the asset class, he has decided to buy an exchange traded fund (ETF) instead of using an actively managed portfolio.
The reason for that, he says, is the issue of liquidity and also because he doesn’t want to be exposed to junior gold miners at this point in time.
“The main point is really about liquidity,” Harris explained.
“The problem is the largest fund in the sector is Blackrock Gold & General. I, for instance, can’t go and buy a small fund.”
“If I am wrong, I can get out of an ETF quickly, but I could well be stuck in an actively managed fund.”
“However, more importantly with passives you are basically just getting exposure to large –caps and while active managers say there might be better opportunities in mid and small-caps, large-caps are much better financed which is important at the moment.”
For his exposure, Harris has been buying the iShares Gold Producers UCITS ETF. The fund offers high exposure to world’s largest mining companies such as Barrick Gold, Goldcorp, Newmont Mining and Newcrest Mining. It has an ongoing charges figure of (OCF) of 0.55 per cent.
Harris took over City Financial’s fund of fund range in January 2013 having previously headed up the multi-manager teams at both New Star and Henderson.
He currently manages the City Financial Multi Asset Balanced, City Financial Multi Asset Diversified, City Financial Multi Asset Dynamic and City Financial Multi Asset Growth funds. All four of them have beaten their respective sectors since January 2013.
His stand-out fund has been the City Financial Multi Asset Diversified portfolio, which has been the best performing fund in the IMA Mixed Investment 0%-35% sector since Harris took over having delivered top quartile returns in both 2013 and so far in 2014.
Performance of fund vs sector since Jan 2013
Source: FE Analytics
Harris says that having performed very well last year, investors should expect equity returns to be considerably flatter in 2014 as earnings catch up with recent re-ratings.
The £60m City Financial Multi Asset Diversified fund’s positioning reflects Harris’ less optimistic view on risk-assets.
For instance, he holds just 20 per cent in equities and 6.3 per cent in cash. The rest of the portfolio is spread across fixed income funds and alternative assets, such as private equity trusts and real estate investment trusts (REITS). Its OCF is 2.35 per cent.
