Coping with Covid-19: Gold vs Tech vs Quality vs FTSE vs Cash

My investor friends seem to be coping with Covid-19 in different ways.

Certain investing themes are emerging – some bearish, some bullish, some not so sure. I thought I would track some of the broader strategies.

Cash – reflecting those who have sold out and awaiting the full financial effect of the pandemic to prompt a market meltdown.

Gold – as Cash, but speculating that gold might generate a positive return while awaiting a market meltdown.

Tech – represented by a Nasdaq 100 tracker, and promoted by those (of which I am one) that believe the pandemic will accelerate all sorts of tech-related trends (working from home etc).

Quality – represented by Finsbury Growth & Income run by Nick Train, and cited as way of continuing to back ‘quality shares’ but deferring to an expert rather than DIY stock-picking in an unpredictable market.

FTSE – represented by a FTSE All-Share tracker, and is included as a benchmark to gauge the other four themes.

I have set up a quick portfolio in SharePad to monitor the approaches:

Cash of course will give a 0% return. The FTSE and Finsbury investments exclude dividend returns. The Nasdaq tracker accumulates dividends, but such payments are small and may not make a difference to the relative long-term verdict. Gold does not pay a dividend.

Let’s see how they perform. Any early thoughts on the likely outcome?

Maynard

Hello,

Perhaps an alternative to cash which are perhaps bond-like in nature, at least until we know the future base-line of ‘traditional’ trading companies?

I am specifically thinking of companies such as;

  • Phoenix, PHNX (sector Life Insurance). This company hedges against most classifications of risk (equity valuation/interest/currency/longevity) and effectively makes it’s dividends through efficient management of their pension ‘reservoir’. There is possible growth through it’s strategic partnership with Standard Life, and purchasing annuities, which will hopefully off-set the run-off in the historical pension business.

Some would argue corporate bond degrading may cause these investment to be higher risk, but I believe Phoenix would rotate out of those bonds which have been downgraded in risk by selling them (possibly to the government?) and purchasing higher quality ones.

This company’s valuation appears to have been dragged down with other insurance and generally with UK companies, unjustifiably in my opinion, however time will tell!

  • IG Group, IGG, (sector Investment Banking and Brokerage Services). This company has high ROCE and margins. It is a market leader which from profits market volatility and similarly to PHNX hedges it’s risk (if it learnt it’s lesson from the Swiss Franc episode!).

The main risk with this company is regulatory, in my opinion.

To go through the other strategies;

Gold If someone is trying to trade an increase in price then perhaps gold miners would be a geared investment along these lines (both up and down!). Personally I don’t invest in gold but if I did I would probably pick a miner with the lowest production cost with decent reserves rather than the highest yield and rather than the physical element and hold in perpetuity to reduce portfolio volatility.

Tech - Yes I am invested in this area and I think it will do well for the reasons you mention.

Cash - Not one for me , if only because the odds of future inflation have been dramatically increased due to huge increases in government debt. Imo, the only the only way to hedge inflation effectively is by investing in the right companies who can increase their profits/prices in line or above the inflationary rate. To hold cash is emotionally one of the easiest things to do but not the correct in my opinion because it has low returns as an asset class and you can guarantee share prices will shoot up whilst out of the market (e.g. US tech stocks).

Quality - Yes I think this is a great idea for many reasons. In part due to the inflation comment above and also due to Charlie Monger’s ROCE comment that over the long term it is difficult to get a return over the long run without a decent ROCE and initial valuation matters less over time (provided the initial long-term investment thesis is correct!).

FTSE all-share tracker - Probably good if someone doesn’t spend much time analysing companies however there is an awful lot of dross/zombie companies are in the mix here which I would never commit capital to !!

Ben

Hi Ben

Many thanks for the reply.

Sorry, my fault – I did not explain the whole story in the original post.

Cash is basically a default option while certain investor friends await a market meltdown and hope to have the opportunity to pile in at bargain prices. So I would suggest this ‘investment’ horizon is perhaps 2-3 years – although who knows what long-term ramifications the pandemic will eventually bring to the market. Same plan with gold, but with the chance of a positive return in the meantime.

FTSE – this was a benchmark to compare how the different themes perform. I think for a tracker investor, a global/S&P 500 index would be more suitable for the zombie reason mentioned.

PHNX – not a sector where I really understand the accounts and what exactly is going on.

I remain invested in the market, and have bought a Nasdaq tracker for my son’s pension in March/April based on accelerated tech trends.

I just think going into cash/gold seems too drastic – although many ‘quality’ companies have cut their dividends (e.g. Rightmove, James Halstead, Quartix, etc), so maybe this downturn really is different.

Maynard

Maybe it is only different this time because everything shut down on a sixpence. I think, as last time, the strong companies will get stronger and the ones which should have disappeared in 2009 will go out of business this time and we will have a stronger econmy for it on the end. Schumpeter’s creative distruction if you like!

If I got out of the market I would never know when to get back in giving me more problems. This would just make life harder for me with more decisions to make. For example my tech portfolio was down 25% and is now up 20% I. E. Up over 45% from the low point- crazy times indeed!!

The other thing is missing the few best days by being in cash or gold would hugely reduce returns, so that is another risk to switching out of shares…

I don’t personally think it is different this time - it’s the same thing with a cruel twist but I may be wrong…

Obviously everyone should DYOR as they used to say on The Motley Fool! lol

Agreed. I have some experience of getting out of the market. I sold all my shares in the autumn of 2007, although the prompt was not so much predicting a huge market crash but being ready for a possible huge property crash (which did not really happen). So I made the right investing decision for sort of the wrong reason. I do recall during late 2008 being tempted to invest again, but the market then went on to fall lower by March 2009. I also recall the market rebounding very quickly from the bottom, although I did not know it was the bottom at the time. I am pretty sure most deliberate ‘go into cash-ers’ i) sell everything too early, ii) sell everything too often and iii) remain too bearish for far too long.

Maynard

Wow! It must have saved you a packet (being right for the wrong reasons and getting out of the market!) Congrats! We all need a little luck, I think

In my experience stop losses (for getting into cash) can mean stop profits in the long term, so I just try to look at the underlying business performance, but it is mentally hard to do !