This article is written in response to requests from several of our readers who are happy to take on a higher degree of risk in exchange for higher potential rewards. The suggested portfolio is designed to capitalise on the primary investment themes that we see over the next 5-10 years.
Ideal portfolio asset allocation (Click on the chart for a larger version)
Investment theme: Physical gold forms the foundation of the portfolio since it has a long history of wealth preservation during times of financial distress. Gold helps protect investors from the deliberate policy of currency debasement that is being enacted by governments around the world. Because it provides vital portfolio insurance, investors should hold their metal in physical, “allocated”, form, outside the banking system, and not in the form of an ETF or other paper product.
Possible investment vehicle: Two companies to consider are BullionVault and GoldMoney, both of which will store your gold for you in physical, allocated form, in exchange for a small fee.
Investment theme: Silver is rising for many of the same reasons as gold, often being referred to as “poor man’s gold”. However, in addition to being a monetary metal, silver is an industrial metal. In 2011 around half of silver demand came from industrial applications such as, batteries, catalysts, electronics, solar energy, water purification and medicine.
Silver should continue to benefit as a hedge against monetary malaise. However it is also likely to benefit from economic expansion, particularly in Asia.
Possible investment vehicle: BullionVault and GoldMoney also allow investors to own silver.
Precious Metals Equities
Investment theme: Precious metals equities, i.e. the companies that find and mine the metal, provide leverage to the price of gold. Over the past 12 years the price of gold has risen 528%, while the HUI gold stock index has risen 815%. More recently gold and silver stocks have underperformed, however, once the metals gain momentum to the upside the stocks are likely to outperform once again. The key is to select quality companies that are focused on delivering shareholder value.
Possible investment vehicle: The Black Rock Gold & General Fund provides exposure to 50-80 high quality gold mining, commodity and precious metal related equities. The fund, which is managed by Evy Hambro, allocates around 50% to its top ten holdings which include large blue chip names such as, Newcrest Mining, Goldcorp, Agnico-Eagle Mines and Kinross.
Precious Metal Royalty Companies
Investment theme: Precious metal royalty companies, do not actually run a precious metals mine or explore for the ore-bearing rock. Instead, they provide cash to those who do, in exchange for a discounted percentage of the metal they produce once they are fully operational.
Possible investment vehicle: Over the next 3-5 years a basket of companies (such as Franco-Nevada), is likely to perform very well indeed and many of them pay decent dividends.
Investment theme: The agricultural sector stands to benefit from the long-term trend of rising food prices. There are a number of ways to gain exposure to rising food prices, however perhaps the best is to invest in the companies that produce it.
Possible investment vehicle: The KBI Institutional Agri fund invests in international companies involved in the agricultural sector. The fund specializes in mid-sized value and growth companies, and includes names such as Potash Corporation, Deere & Co, Mosaic and Bunge. The fund has received a five star rating by Morningstar.
Another possible way to gain exposure to the sector is via the Market Vectors Agribusiness ETF (NYSEArca: MOO). The fund holds 51 different companies which include Monsanto, Potash Corp. Deere & Co, Archer Daniels Midland, Mosaic and Agrium.
Investment theme: The growth rate of the Chinese economy is once again picking up pace, and as a result emerging market equities are breaking out to new highs.
Possible investment vehicle: The Aberdeen Emerging Markets fund aims “to provide an attractive level of income and long-term capital return” and as a result it focuses on large-cap growth companies. Among its top 10 holdings are Samsung Electronics, China Mobile, Vale and Petrobras. The fund has received a five star rating by Morningstar and has a Gold Morningstar OBSR Analyst Rating.
Japanese companies are poised to benefit from radical policies that are designed to weaken the Yen.
Possible investment vehicle: The Japan Strategic Value fund, which is provided by JPMorgan, is designed to provide long-term capital growth by investing in a portfolio of Japanese companies. The fund focuses on large-cap value companies such as Toyota, Mitsubishi, Sumitomo Mitsui Financial Group, Hitachi and Nissan. The fund has received a five star rating by Morningstar.
Investment theme: The materials sector should begin to benefit from the renewed strength of the Chinese economy and the inflationary wave that is likely to hit the global economy in the next 12-18 months.
Possible investment vehicle: Both the JP Morgan Natural Resources fund, and the BlackRock World Mining fund should stand to benefit. Both funds have received a three star rating from Morningstar, and both include Rio Tinto, Freeport-McMoRan Copper & Gold, and Xstrata in their top 10 holdings.
Investment theme: As rising taxes and inflation take their toll, consumers can be expected to cut back on discretionary spending. As a result an allocation to solid companies that provide consumer staples makes sense.
Possible investment vehicle: The Fidelity Global Consumer Industries fund invests in large-cap growth companies such as Nestle, Diageo, Coca-Cola, Procter & Gamble and McDonald’s. The fund has received a four star rating from Morningstar.
An alternative to the Fidelity fund, is the Vanguard Consumer Staples ETF (NYSEARCA:VDC), which also holds Coca-Cola, Procter & Gamble, but also holds Philip Morris, Wal-Mart and Colgate-Palmolive.
Investment theme: Energy prices should continue to be supported by growing demand from fast growing Asian economies. They are also likely to be pushed higher thanks to rising inflation fuelling a move towards real assets.
Possible investment vehicle: The BlackRock World Energy fund holds companies that are involved in the exploration, development, production and distribution of energy. The fund is geared towards large-cap names such as Chevron, Exxon Mobil, BP, Schlumberger and ConocoPhillips. The fund has received a three star rating by Morningstar and has a Silver Morningstar OBSR Analyst Rating.
Investment theme: The healthcare industry should continue to benefit from the demographic tailwinds of an ageing global population.
Possible investment vehicle: The JPMorgan Global Healthcare fund invests in pharmaceutical, biotechnology, healthcare services, medical technology and life sciences companies around the world. The fund favors large-cap growth companies, and among its top 10 holdings are Merck, Roche, Pfizer and Bayer. The fund has received a five star rating from Morningstar.
Investment theme: Productive organic farmland stands to benefit from the rising demand for organic food.
Possible investment vehicle: One company that is well placed to capitalize on this trend is Farmland LP, a US private equity fund which acquires conventional farmland and converts it to organic farmland.
Investment theme: In their attempts to stimulate economic growth, governments around the world are spending large sums on infrastructure.
Possible investment vehicle: The Global Listed Infrastructure fund invests in a diversified portfolio of listed infrastructure companies from around the world. The majority of its holdings are large-cap value companies such as Vinci, National Grid and Exelon. The fund has received a five star rating by Morningstar and has a Silver Morningstar OBSR Analyst Rating.
NB: Many of these funds can be held inside a tax efficient stocks and shares ISA.