This month Neil Birrell, Premier Miton’s Chief Investment Officer and lead manager of the Diversified fund range, has a reality check and wonders if everything that sparkles is gold.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
In favour: reality
I cannot think of a corporate results announcement that was as eagerly anticipated as Nvidia’s at 9.20pm (BST) on Wednesday 28 August 2024. That morning, I had conversations with journalists at the FT and Bloomberg who were interested in what was going on in markets. It felt like everything was on hold until we’d heard from Nvidia.
By 9.21pm the news was out. Revenue for the three months to the end of July was $30bn compared to analysts’ revenue consensus forecasts of around $28.7bn, up 122% from the same period a year ago. The company also said it was expecting the next three months to produce $32.5bn (+/- 2%) of revenue, again ahead of expectations. Furthermore, it allayed fears of supply bottlenecks and announced an additional $50bn share buy-back. All good stuff. The share price fell in afterhours trading, by up to 6% at one point. It fell further in European trading hours. By the time you read this it could be even lower, or it could have recovered. But that’s not the point.
Let’s look at the reality. Nvidia is a high-quality company at the cutting edge of a technology that could revolutionise our lives and it is growing at a spectacular rate. But simply, that reality was not good enough for investors, analysts, traders and gamblers. We have got used to Nvidia smashing expectations and it didn’t. The share price fell as a result. Let’s extrapolate that to the bigger picture, if there is a bigger one than Nvidia, and look at interest rate expectations. The reality is that they have fallen in the UK, EU and many other countries and all indications are that the Federal Reserve will cut rates in the US on 18 September. But what happens next? They will probably head lower still. By how much and at what speed? This is where the “reality gap” kicks in; the gap between what actually happens and what we hope will happen. It exists on everything from macro-economic data to the profits announced to companies. Those gaps can be big.
In managing the Diversified fund range we focus on the reality, not hope. As we saw with Nvidia, which we fully sold out of in July, hopes can be dashed; it doesn’t mean it’s a bad company, it just didn’t meet highest expectations. It will be the same if US rates don’t fall as expected, or fall faster than expected; bonds, equities, gold, Bitcoin and most other asset classes will react.
We remain positive on equities, particularly medium and smaller sized ones globally. We also like the UK overall but are nervous on the valuations that much of the technology sector and the giant US companies stand on. We can find many exciting companies to invest in. We continue to see great value property companies across the UK and Europe, and we can find attractive alternative investments that diversify the portfolios. The returns available from sections of the bond market provide a fantastic bedrock to the funds.
But we remain cautious in approach, taking note of the reality that it’s not all good news and there is the risk we could be disappointed.
Out of favour: gold
Gold price
Source: Bloomberg 31.03.1920 – 29.08.2024. Past performance is not a reliable indicator of future returns.
There are few things that I feel I have missed out on over the years managing the Diversified funds, indeed even before that. However, gold is one of those. That’s not to say it’s not an attractive or useful asset. I understand that it can diversify portfolios, act as a hedge and how it is supposed to behave in inflationary periods and stressed market conditions.
The problem is, like all other asset classes, it doesn’t always do what it is supposed to do and, frankly, I don’t understand it!
Furthermore, no one in the Diversified funds investment team is an expert in gold either and we believe we can find investments we do understand that we are more certain of that provide the benefits of gold.
So, as gold heads to all-time highs, we will be watching it, wondering if the reality will match the hopes.
Neil Birrell
Premier Miton’s Chief Investment Officer and lead manager of the Diversified fund range
