In recent months, we have taken positions in gilts, cash and gold although we have since taken profits in some of our Government bond holdings and are starting to look at corporate debt. The real pain in debt markets has been due to the leverage employed and fortunately we sold all our corporate bonds in November. We are now starting to buy back, given some of the attractive yields on offer. It strikes us that much of the pain has now been seen in fixed interest although there is likely to be more to come in equities, particularly Western equities. We have not actively sought a high cash position but are not being quick to deploy cash as it comes in, taking time to look for opportunities. Profits realised from some of our gilt sales have been partially redeployed into gold, with the team buying a physical gold exchange traded fund for the first time.
We see our holding in gold as an insurance policy. If the global economy is fine, we will sell the position. If not, gold could prove a worthwhile investment. Its price has hit new highs in the past quarter but it is nowhere near its all-time high in real terms. Whether we are in a deflationary bust or an inflationary spiral, it seems sensible to have a holding in a non-paper currency. We are also using ETF positions in other ways, recently selling a position in a FTSE ETF which we had used as a short-term play on the UK equity market.
In a bear market, the rotation between asset classes is often higher than usual. With volatility providing trading opportunities, we are more active than we have been for almost three years. The surge in commodity prices is becoming an increasingly serious problem for the world economy as it creates upward inflationary pressure but we believe the long-term fundamentals for commodities will remain in place for many years to come.
In a bear market, the priority is to preserve capital and then seek to take advantage of opportunities when you see them. Some equities appear to be cheap but it is wise to be wary of what constitutes cheap in today’s market. Investors who hold their nerve, buy quality investments and take a long-term approach often turn out to be most prudent.
John Chatfeild-Roberts is head of the independent funds team at Jupiter