Over the past month my self-invested personal pension (Sipp) has missed out on much of the increase in the global stock markets. I'm not surprised by this underperformance (relative to the wider market), largely because 27 per cent of my holdings are in cash and only 44 per cent of my portfolio is currently tracking an equity index. Even within that component, I have formidable exposure to more defensive sectors such as utilities or infrastructure funds.
That high level of cash is consistent with my overall view about the financial markets, with lots of red flags on display in these volatile times, and too few investors taking notice of them. The key issue remains Europe, on which I'm waiting for public confirmation of the new financial governance structures. I am not a believer in a eurozone 'death spiral' and I think that the outline of a new structure for European financial management will emerge, but I want to see evidence of this before I move away from my cautious position. It looks like I may have to be patient.
I'm also deeply cynical about the current earnings reporting season and believe that there'll be a slew of profit downgrades and disappointments. The global economy has slowed and the idea that corporate profits can remain immune to this is fanciful, in my view.
Looking deeper into 2012, my view changes. I am becoming much more bullish on the global economy in 2012 as long as we can avoid either a Chinese hard landing or a eurozone meltdown. I don't think any of these worst-case scenarios are likely to happen, although I accept that there's a more than 20 per cent chance that the very worst of our nightmares could unfold. I have a sense that the global economy will surprise us to the upside in the first three quarters of 2012 and I'd be looking to increase my equity exposure as the year goes on.
What does this more bullish view on 2012 mean in practical terms? I'm not currently looking to increase my cash levels above 27 per cent, nor raise my exposure to hedge funds. I would be a keen buyer of certain equities if the markets were to correct over the next few months, though. Ideally I’m looking for another 10-15 per cent downside correction in equities before I start to increase my equity exposure, with a target for the FTSE 100 of about 4750/4500 as a buy signal.
Turning to my portfolio, my shares in Mongolia-focused mining play Ivanhoe continue to recover from a very nasty bout of political interference. My biggest loser was
Two new tracker funds have caught my eye. Either or both might end up in my Sipp over the next few weeks. These two exchange-traded funds (ETFs) are from a relatively new entrant to the UK market,
The SPDR US Dividend Aristocrats fund (ticker: USDV) tracks an index that consists of 60 US stocks from the S&P Composite 1500 Index that have increased their dividend every year for the past 25 years, ie progressive dividend stars. Crucially, the underlying index attempts to avoid any concentration issues (eg, one stock such as BP dominating an index because of its market cap) by capping any individual company at 4 per cent of the index.
The sterling-denominated EM Dividend fund (ticker: EMDV) tracks the S&P Emerging Markets Dividend Opportunities Index. According to the index developer, this tracks the "100 highest dividend-yielding, most liquid stocks from 20 emerging market countries that have stable or increasing three-year dividend growth. Individual stocks are capped at 3 per cent and both countries and sectors are capped at 25 per cent to ensure diversification". State Street says this latter index has outperformed the MSCI Emerging Markets Index by more than 16 per cent since its inception in December 2009 and by almost 15 per cent in 2010.
The total expense ratio for the EM fund is 0.65 per cent while the Aristocrat fund charges 0.35 per cent a year. These funds are a very cost-efficient way to access some especially compelling investment strategies – with the added bonus of a very transparent, physically replicating structure. I'm strongly tempted to buy both if markets do fall sharply in the next six to eight weeks.
David's Sipp portfolio
* NYSE-quoted; price converted ino sterling
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