Cash to Equities – US, China and Gold

Early this month I decided to move more but not all of my pension fund cash into equities. Historically December is the best month for stockmarket index gains. I am not sure of the precise reasons for this but it may be due to end of year performance fees, fuelling buying by fund managers and institutional investors or the holiday season and upcoming New Year making investors feel more optimistic. Markets also traditionally do well in November and December following US presidential elections. This is due to the removal of uncertainties that precede elections. Markets like to know what administration and fiscal policies they will be dealing with.

I also took the view that a deal will be struck on the US fiscal cliff mitigating the impact of tax rises and spending cuts due in January and that markets would respond positively. Finally Chinese equities which have performed badly in recent years seem to offer good potential and buying in at low prices is a risk worth taking. Data from Morningstar to 16/11/12 showed the average IMA China/Greater China fund returned -0.1% over three years and just 3.6% over five years. Chinese shares have hardly been at the races whilst there seems to be more confident signals coming from China.

So I allocated some cash to Chinese and US Mid Cap funds from Jupiter and Schroders respectively. The reason I opted for the latter was that medium sized companies should outperform larger caps in the recovery and growth phases. They are also more domestically oriented, positive given that 70% of the US economy is consumer dependent. Finally I decided to buy into the Blackrock Gold & General fund. This mainly invests in the equities of gold producers. In recent years these have underperformed and there has been a sell off despite the rising price of gold itself. The Blackrock fund was down a whopping 20% in the 12 months to 16/11/12 (Source: Morningstar). The significant disparity between the gold price and gold equities has been explained by high production costs, falling ore grades, hedge fund manipulation of prices, the popularity of ETFs and specific stock selection issues. However in discussion with Blackrock it was explained that gold equities have been more affected by equity markets in general rather than the gold spot price but the fundamentals are positive with good bottom line profits. Some miners are also starting to pay dividends for the first time. That said a trigger for re-rating of gold equities would only happen when equities in general come back into favour.

Time will tell if my tactical asset allocation strategy will work. If not it will be budget slippers for me in retirement! As for you, you should seek individual advice before making investment decisions.