Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Alan Miller, founding partner and fund manager, SCM Private.
I have some very simple rules that have served me well over the last 20 years: only invest in something you understand; try to buy something when it is significantly undervalued; and seek always to be contrarian. When everyone is despondent and revelling in doom about a stock or investment, it’s more often than not the right time to buy. Diversification is another golden rule – don’t put all your eggs in one basket. As a specialist exchange-traded funds (ETF) investment manager, ETFs allow me significant diversification at low cost. There will always be large investment houses trying to sell overpriced and over-hyped products, but it’s best to resist temptation and wait until the right opportunities present themselves.
There are three warning signs to avoid an asset. First, when everyone is buying. Second, when fundamental value is less than the current price. Third, when experts are saying, “It’s different this time.” These apply to gold – when central banks are buying for the first time in years, best to sell. Central banks are not known for their investment acumen. Where is the next buyer going to come from to push the price even higher? What is the real fundamental value?
Government bonds are another sell. Yields are now nearing levels not seen for close to 50 years. Where is the upside? You get your capital back in a number of years’ time and you are paid little interest in the meantime for lending to a highly indebted government.
Thirdly, some (though not all) emerging markets look over-priced. Is there a fund manager out there who isn’t saying you should pile into emerging markets? Yet there is no correlation between stockmarket growth and economic growth. And many of the well-run blue-chips operating in the region, for example, Unilever and Coca Cola, are actually found on western stockmarkets.
As for assets I do like, here are three. Firstly, Japan – I would recommend an iShares MSCI Japan ETF (LSE: IJPN). The main index is down 70% from its peak, due to concerns on Japan’s large debt, ageing population and archaic ways of doing business. People tend to forget the valuation – it has never been sensibly valued before, trading on around 15 times earnings with a 2.8% yield, 1.1 times book value and 17% estimated earnings growth. Given deflation, the costs of Japanese companies are falling, so they can cope with the higher yen, companies are becoming more shareholder-friendly and there is significant potential for margin recovery for better-run companies.
Secondly, there’s natural gas. The ETF Securities Natural Gas (LSE: NGAS) fund is a good way to invest. For years there was a relatively stable ratio between the oil price and the gas price. Now, thanks to new technology, the price of gas has fallen close to 40% this year. But the current price makes reserves uneconomic until the price more than doubles. And the full environmental impact of gas shale still has to be assessed by the US Environmental Protection Agency.
A third asset I like is UK property. The iShares UK Property ETF (LSE: IUKP) holds a basket of 40 property stocks, with the average discount to net asset value (NAV) on most major property stocks today being around 16%. Rents and capital growth are likely to outpace inflation in the medium term, making this ETF an attractive long-term hedge against inflation.