Where was the smart money in 2009?

Where was the smart money in 2009?
Smart investors have managed to make money regardless of the recession and economic doom and gloom.

Emma Simon
Published: 6:44AM GMT 15 Dec 2009

For many families 2009 has been a tough year: unemployment is rising, pay packets have been squeezed and easy credit is hard to find, despite the fact that interest rates fell to a historic low.

But smart investors have managed to make money regardless of the prevailing recession and economic doom and gloom.

Gold has long proved to be the ultimate safe haven in times of global turbulence. And those who invested in this precious metal have enjoyed sparkling returns, with the gold price rising by almost a third.

It isn't just cautious investors who have profited. Those bold enough to stick with the stock market have, on the whole, enjoyed bumper returns.

The figures speak for themselves. On January 2, the FTSE100 stood at 4,434. For the first three months of 2009, share prices continued to fall, with the stock market hitting a low of 3,460 in March.

However, since then the market has enjoyed a sustained, and largely unexpected, recovery. Last week the FTSE100 closed at 5,261 – a return of almost 20 per cent on the whole of the year.

Those who have kept their money in cash have not fared so well. According to Moneyfacts, the financial information group, the average savings account is paying just 0.67 per cent after tax.

But beleaguered property owners have enjoyed a turnaround in fortunes. The slump in house prices bottomed out this year, with prices slowly starting to inch upwards again.

Property speculators may not be seeing the stellar gains that fuelled dinner party conversation a few years ago, but at least the home owner can end the year knowing the roof over their head is worth more than it was 12 months ago.

Below we take a closer look at where the smart money was invested this year, and examine the outlook for 2010.

Gold

Gold prices started rising in 2003 and did not lose their lustre this year. At the start of the year, gold prices stood at $869 per ounce and now hover about the $1,142 mark – a rise of 31 per cent.

But British investors have not seen such substantial gains. This is because gold is priced in dollars, and a weak dollar means that we lose out.

The prevailing exchange rate at the start of the year meant an ounce of gold cost £599; at the end of last week, this same ounce could be sold for £700 – a more modest rise of 17 per cent.

It is not hard to understand why gold prices have risen. It is seen as a safe asset in times of economic upheaval. Those spooked by recession, financial crisis and volatile stock markets not surprisingly prefer to invest in solid gold bars rather than paper share certificates.

Those concerned about inflation have also turned to gold: there are concerns that that "quantitative easing" measure adopted by central banks to kick-start the economy may causes prices to rise in future. In times of inflation, gold tends to keep its value far better than money simply saved in a bank account.

The price of gold has also been buoyed by strong demand from the emerging economic powerhouses of China, India and Russia.

Will it continue to perform well next year?

Analysts are split. Few assets deliver consistently over such sustained periods and many suggest that gold prices may be due a fall. However, others point out that while China keeps buying gold, the economy continues to falter and fears of inflation remains, gold will continue to shine as an investment.

British investors can either buy gold bars or coins through bullion dealers such as Baird & Co. Prices will be higher than the "spot" market price, due to investor demand. Coins currently attract a higher premium than bars, particularly larger ones where there are storage costs to consider.

Alternatively, investors can buy funds that invest in gold-related shares, such as mining companies, or exchange traded funds, which are securities traded on the stock market whose price closely follows the gold "spot" rate.

Equities

The stock market bounced back this year, and investors in the best-performing funds managed to triple their money. A look at the best-performing funds of the year reveals that it is those with their money in specialist high-risk areas that have raked in the biggest gains.

Top of the tree is the Special Situations fund run by Close Asset Management. This fund, which invests in smaller companies, rose in value by almost 250 per cent over the past year. So someone investing £,1000 at the beginning of January would now be sitting on a nest egg of £3,464, according to Morningstar UK, the fund analysts.

Aside from smaller company funds, those who invested in gold and oil have also done well. JP Morgan's Natural Resources fund and CF Ruffer Baker Steel Gold fund have both risen by about 100 per cent this year.

Rising commodity prices have also benefited funds focused on Russian markets, while other emerging market funds have also performed well.

Neptune Russia & Greater Russia fund is up 105 per cent, for example, and JP Morgan's New Europe fund has posted a 93 per cent rise.

Justin Modray, the director of candidmoney.com says: "2009 has been a good year for investors who have had exposure to oil and gold. It's therefore little surprise that funds with exposure to these commodities have performed well.

"Good opportunistic UK fund managers have also done well by seizing the lucrative investment opportunities thrown up by volatile markets.

"Deryck Noble-Nesbitt, manager of Close Special Situations has delivered exceptional returns by investing in small, unloved companies that bounced back into favour this year, and exposing about a third of his fund to commodities."

Jackie Beard, the director of fund research at Morningstar UK, added that the returns on such niche funds tended to be exaggerated. Those with money in Russia may have made spectacular gains this year, but twice in the last decade, investors could have lost 85 per cent of their money.

Will such sectors prove as profitable in 2010? Ms Beard urges caution: "The top-performing funds in one year rarely do so well in the next," she says. "And there is a danger you could simply be buying near the top.

"We aren't strong advocates of niche funds. Investors should only have a small portion of their portfolio in such funds. Investors should be taking a long-term view and opt for diversified investments."

Mr Modray says the outlook for 2010 is very uncertain. "The initial stock-market bounce, once investors realised the global banking system wouldn't collapse, has been and gone. Future returns will depend more heavily on economic fundamentals, which are all rather depressing in most Western markets.

"Emerging markets and commodities still offer some appeal, but the high potential risk involved means investors should only view them as a long-term play. If you want to invest in the UK stock market, I'd look for funds that offer some protection."

He recommends the Invesco Perpetual High Income fund, managed by Neil Woodford and the Cazenove UK Absolute Target fund.

http://www.telegraph.co.uk/finance/personalfinance/investing/6812083/Where-was-the-smart-money-in-2009.html