As readers of my posts will know, I have been a proponent of Index Linked gilts as the ultimate safe haven for UK investors for a long time. The largest single holding in my SIPP (apart from cash itself - currently 13.5% of my SIPP) is 2030 4 1/8% index linked gilts (6.6%). I observe that the "clean price" for these has hit a record high this week @ £286.31. This has certain implications.
Assuming an inflation rate of 4% (over the next 19 years), I calculate that the real redemption yield on these (i.e. the annualised return, including coupons and ultimate redemption on maturity, after RPI inflation) is now just 0.4%. With a 2% inflation assumption that becomes 0.39%. With a 6% inflation assumption it's 0.41% - so not much sensitivity in the real yield to inflation.
What the market is saying is that (on average) over the next 20 years it expects a very low real rate of return for cash. It could also be an expression of fear of runaway inflation in the short term. Over the last year these instruments have risen by almost 14%, whilst the RPI has increased by 5.0% [1] . That's an excellent return in itself - and I have been reducing my holding over the last few months to take advantage of these gains* and as the redemption yield has become less attractive. This shows that the expectation of low real interest rates over the long term in the UK has increased significantly.
Either way, it surely implies that holding a large proportion of your portfolio in cash is not a "safe" thing to do, in the long run? Unless, of course, you expect an imminent crash in the markets and that you will be able to take advantage of it. Anyone that went to cash in July 2007, and has stayed there, will have seen a negative real return on their cash. RPI has risen by over 14% in that period. The yield on the index linkers suggests that this situation is going to get worse.
My conclusion: unless you are confident that you can pick the right time to re-enter the markets (and many missed the bottom in 2009 and were warning that markets could continue to get much worse), simply staying in cash is not a safe option. Nevertheless, there are clearly significant risks out there: sovereign defaults and/or a Chinese "hard landing". For UK focussed business we also have the risk of fiscal austerity and government job losses bringing the economy to a grinding halt. It is my experience, however, that often these events (which "everyone" feels are imminent) take much longer to occur than expected. Staying in cash whilst waiting for the "inevitable" is not necessarily the safe thing to do, however, being fully invested is equally dangerous.There are no easy answers. I try to take a balanced approach.
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Regards,
Mark
*That's a natural consequence of my asset allocation strategy. As the price rises and the proportion of my porty invested in these gilts increases I am compelled to sell some, to maintain the desired balance.
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I think having a lot of cash only makes sense if there is a real prospect of catastrophic deflation, which there isn't. OK there may be temporary "crashes" based on the fear of the banking system imploding again, but the Fed and ECB (plus China etc.) won't let this happen since it's just not politically possible to instantaneously plunge 95% of the population into abject if perhaps temporary poverty. Not to mention that most Western countries (the US excluded) don't have the security apparatus to impose the martial law that would be required when nobody can get paid for doing anything.
We will therefore basically live for the rest of our lives in a slow-grinding journey to hyper-inflation via money-printing. The "robust" economic growth which the powers that be are hoping will eradicate the debt mountains simply cannot happen in the West due to the ever-increasing cost of the marginal unit of energy (or "peak oil").
Given these rather dire circumstances what I am doing for safety or cash equivalent is gold and silver royalty companies, which are and will remain debt-free, cashed up and pay a growing dividend, albeit in horrible USD.
There are three of these vehicles available:-
T.FNV - Franco-Nevada (yield 1.3%)
T.RGL - Royal Gold (yield 0.7%)
T.SLW - Silver Wheaton (yield 0.3%)
Note Royal Gold performance in 2008 ...
These are not my only investments, but they are most definitely the core.
P.S. I wouldn't buy an index-linked gilt if you paid me.
Hi Mark,
My take on this (as someone who has held a mix of cash, linkers and conventionals for the last 4 years - and who has raised the % of cash during this period) is that "safe" isn't really the right word. It is "safe" in the same sense that paying insurance premiums is "safe".......you know it will almost certainly cost you money, but it does offer less market risk than other alternatives (including all sorts of bonds). In addition one has cash ready for "opportunities".
All my bonds,both RPI-linked and conventionals have clearly outperformed cash. But outperformance tells only half the story......after all, the biggest bond guru in the world (Bill Gross of Pimco) was saying only a year ago to avoid gilts like the plague and generally pointing to bonds in the UK and US as being exposed to sharp rises in yield (and so he underweighted them). I was much more bearish on the economy than Gross, so I did nothing...neither piling into equities with my cash nor selling bonds and switching into stocks (as many were encouraged to).....and now we have a situation where bonds have again done pretty well as uncertainties of all sorts have risen. BUT - if Gross had been right then bonds would have lost more than cash, because of the higher risk.
In sum, there are no easy answers - especially with the Eurozone and US budget problems looming......but one knows where one is with cash (more or less) for the short to medum term - and that has a certain amount of value, especially for those with above average risk (at least in theory) in the rest of the portfolio.
rgds
ee
Thanks gents for both of your posts, which I think are excellent and have duly recced.
Now this is an excellent point, but as you've probably learnt in our BB conversations over the years, I'm a "glass half full" kinda guy :0). The peak oil issue, which does appear to be coming to a head now, is a crisis/opportunity turning point. Soaring energy costs will be a strong driver for innovation, both in generation and energy conservation/reduction. Of course, it will be quite a few years before the large-scale impact of innovation can be felt and we will undoubtedly be in for tough economic times in the meantime, but it certainly opens up some investment opportunities. When investing, one must bear in mind, however, that for every successful innovative company there will be many duds. Picking the winners is the tough part! I'd like to elaborate on a couple of themes that arise from this.
Firstly, at the national level. My own view is that nuclear power will play a key role in meeting the looming power generation gap (without resorting to a huge expansion in coal-fired power generation). ISTM that events at Fukushima have been blown out of all proportion in the public's perception. Though those events were horrible (and would not occur with the latest generation of reactor design, which use passive convection cooling once shut down), exactly how severe have the consequences been? Whilst consequent deaths and injuries are hard to measure, I believe they will number in the low hundreds at the very worst. That compares against thousands of deaths annually in the coal mining industry and countless more from air pollution as a result of burning it. Whilst wind and solar may be useful, they just aren't enough in terms of scale, reliability/availability of power production and CAPEX per kW of capacity.
This is where I see an opportunity at the national level for the UK (and, FTM, for France). It appears that ill-informed German public perceptions are causing the German govt to commit to dismantling existing German nuclear capacity. Germany is shooting itself in both feet by doing so. If the German govt does implement this policy, the country will make itself reliant on foreign energy suppliers: primarily France (which is massively committed to nuclear power) and Russia. OTOH I am pleased to see that the UK govt seems to be taking a more hard-headed and less hysterical view of nuclear power and is pressing ahead with our own plans:
As long as we can finally "get this show on the road", without planning enquiries adding many more years of delays, the UK will have a distinct economic advantage over Germany in the years to come, when German manufacturers find themselves faced with much higher power costs than British ones. The UK, of course, was one of the original pioneeers civil nuclear power - though slipped well back due to subsequent govt. dithering whilst other nations (notably France) pressed ahead. That leads me on my second theme.
At the more practical level, there are a number of UK businesses that could benefit from the need for innovative solutions addressing the macro theme. Some that I have in my portfolio are:
Regards,
Mark
Long-term I think you're right about nuclear, but right now what I might perhaps get enthusiastic about is the on-going globalisation of the natural gas market. Moving nat gas around and putting it into power stations and vehicles is probably the easiest answer to an increasing oil price and the political difficulties of nukes.
Japan is now thinking about going completely non-nuclear, which would mean dramatic increases in oil and LNG imports.
http://www.reuters.com/article/2011/07/15/us-japan-power-analysis-idUSTRE76E1ZI20110715
I just discovered this stock today. Golar LNG is a leading LNG tanker and FSRU operator. It's Nordic, part of the same stable as Frontline (oil tankers) and Seadrill (deep-water drilling).
Nice chart ...
No position either now or planned.
Just on that point, my jaw dropped yesterday when the TV reported that the next round of MotoGP in Japan won't take place, apparently because the riders were too scared of the risk of radiation. This is largely confirmed here.
The astonishing part of that is, of course, that all the major teams are Japanese.....
Japan has more reason than most to consider non-nuclear (given that the tsunami/earthquake risk is very real) but there is a serious issue of practicality, given lack of energy resources. It is also a massive step for Germany, who look likely to plug their energy gap via a combination of Russian gas (thereby increasing the risk of Western Europe being "over a barrel" on supplies, as with Ukraine) and French nuclear......which isn't without security risks either.
ee