Fund Management
“As The Last Dodo Said: ‘Everybody has Won and all Must have Prizes’,” Alice in Wonderland

The surge in asset prices which is boosting the fortunes of investors across the world can be viewed as sublime, ridiculous and probably bot...
The surge in asset prices which is boosting the fortunes of investors across the world can be viewed as sublime, ridiculous and probably both. The prices of crude oil and assorted base metals have soared to a record high and gold has achieved a record peak. US and European equities have hit five year records. Asian stocks have powered to levels not seen since before the Asian financial crisis of 1996.
Everything in this mix suggests inflation should be soaring on the back of surging natural resource prices and economies growing at a pace rarely seen in recent memory, led by 10 per cent growth in China. But government data on the cost of living is continuing to send out a reassuring message with a little help from a downward massage by the authorities.
Banks are effortlessly offloading risk onto the credit derivatives market. Bond prices are stable following a precautionary rise in the US Federal Reserve rate, partly thanks to purchases by the Chinese authorities to keep their currency weak.
The Goldilocks theory runs that China’s manufacturers, India’s service industry and various other emerging economies are taking the heat out of inflation by putting together exports at a price which would be considered suicidally low in the West.
Technology is helping Western companies to offer services at surprisingly low prices, whether or not they use call centres in Bangalore. Growth and cost cutting are taking place at a sufficient pace to offset easily the rising cost of natural resources.
But theories don’t make money unless there are people who are prepared to back them with hard cash. And it is the buying power of wealthy individuals across the world which is playing the lead role in propelling asset prices skyward.
Beleaguered pension schemes, currently switching to bonds, certainly aren’t the cause, and the retail investor remains nervous of the market following the equity correction of between 2000-2003. But the wealthy have never had so much money to invest.
Spectrem Group, the data provider, recently pointed out that the number of households worth more than $5 million in the US rose by 26 per cent last year. The number of millionaires was up 11 per cent to a record 8.3 million.
The number of wealthy individuals being created in Russia and Asia has increased even faster. The assets which will be invested by the wealthy by the year 2009, according to Bear Stearns, will rise to $42 trillion, representing a 37 per cent rise on 2004. And this is probably an under-estimate, given the way emerging market entrepreneurs manage to take a fair chunk of economic growth for their own use.
Activity in the art auction rooms is a reliable proxy for sentiment among high net worth investors and prices achieved in New York jumped by 40 per cent last year, according to Artprice.com. After quite a grind, they have moved decisively ahead of a previous price peak set in the year 1990. Art price hikes for Chinese Avant-garde and Old Masters were nearer to 80 per cent.
Prices paid for prime London residential property are up by 9.2% over the year, according to Savills, the estate agent. Commercial property yields have hit twenty year lows. Even postage stamps, in the doldrums since the late 1970s, are making a come back.
Occasions during which affluent investors will take a punt on everything in sight are quite rare but they do tend to follow a lengthy period of prosperity.
Historian Thomas Macaulay once pointed out that the English gentry of the early 18th Century found it hard to know what to do with the savings following decades of relative peace.
The economist JK Galbraith said there was a similar phenomenon in the 1920s: “If savings are growing rapidly, people will place a lower value on their accumulation; they will be willing to risk some of it against the prospect of a greatly enhanced return.” By a strange coincidence, the latest rash of UK multi-millionaires comprises people who have been promoting gambling online.
Some of the grandest members of the 18th Century gentry ended being made bankrupt by buying stock in the South Sea Company at ludicrous prices. The 1920s boom on Wall Street produced a crash in 1929.
It will take a pretty serious piece of news to put off today’s buyers of assets. It is equally hard to tell which coincidence of events will send their prices into reverse. But emerging market supply disruptions are more than capable of adding a sour taste to Goldilocks’ porridge along with ruinous hikes in the price of crude.