What a difference a few months make. Back in November last year when I last reported on my self-invested personal pension (Sipp), we were all feeling a bit worried about any number of lurking evils. Fiscal cliffs, eurozone pratfalls and Chinese handovers - they were all on the agenda, weighing down second-half returns. Now that the cliffs have been avoided (for now), the quagmires skirted (for now) and the transitions - well, transitioned (in an entirely unsurprising way) - markets are full of life. In that great 'shortcut' of modern investment narratives, risk is back on the table after being hidden in a dark corner somewhere. The cynic might wonder whether we’re now firmly stuck in a Groundhog Day pattern where the first half is brimming with optimism before moving into a more sanguine summer culminating in an increasingly miserable autumn and worrying winter.
The risk is worth it
Personally, I think the Jeremiahs of doom are all - to horribly mix a metaphor - barking up the wrong tree and that the world is probably a more stable place in economic terms than it has been for a long time. That doesn't mean I'm a rampant equity bull, or that I think there are lots of bargains out there - but I do believe that taking on a bit more risk is probably worth it. My own Sipp has moved ahead along with the markets, advancing 7.2 per cent over the three months since the end of November - against just over 8 per cent for the All-Share index. Since I'm still running about 10 per cent of my portfolio in cash and at least another 15 per cent in supposedly market-neutral hedge funds, all in all I'm probably running at par with the market.
The biggest advance was by shares in US hedge fund Third Point Offshore (listed in the UK) run by flamboyant New York-based investor Dan Loeb, who recently upended technology giant Yahoo – these have advanced by 17 per cent over the last quarter. I'd expect these shares to continue to rally and I've got a year-end target of about £14 a share. Biotech Growth Trust has also moved ahead nicely by another 13 per cent and I'm thinking of putting some more money into this investment trust over the next few years - more ideas for spending cash a tad later.
Shares in the Russian closed-end private equity fund Aurora have also shot up in the past few days, largely because it has announced a deal to sell its most successful investment, the Russian equivalent of document storage specialist Iron Mountain. If this deal goes to plan, the fund will receive the equivalent of 27p a share, or 100 per cent of the booked net asset value on the balance sheet, over the next year. That still leaves a handful of other high-quality businesses including the Russian equivalent of B&Q, so I'd say that there’s a good chance that we could see realisations well in excess of 45p a share - that's good news because the fund's directors are slowly winding down the outfit and returning money to shareholders.
On a more general note I'd suggest that there's still some opportunities left for investors looking to make money from funds that are in the process of winding down, largely through selling off illiquid assets by 2015. A sensible portfolio of funds could see returns of between 10 and 15 per cent a year over the next couple of years, with relatively low levels of risk - those numbers strike me as a better bet than most absolute-return funds marketed to private investors.
Oil's not well
Oil prices have crept back up again, which vindicates my long-term view that we are only midway through a decade-long energy crisis. I note the growing enthusiasm for shale gas in Europe (and would then proceed to ignore it, as the planners won't ever let it happen) and I don't doubt that some big new reserves are coming on line, but:
a) There's no getting away from the fact that every time we have a recession, oil prices reset at a much higher price.
b) Whatever freely available oil assets there are, they are now being targeted by Chinese strategic buyers.
c) The easy stuff to drill is long gone.
d) Regardless of your views, climate change is the massive elephant in the room and we have to make the shift to a low-carbon future come what may. The longer we delay this, the more painful it will be.
I kicked myself that I didn't buy shares in Weir (one of the most heavily shorted stocks on the London market), an engineer that supplies both the mining and gas sector, but luckily I have extensive investments in other energy complex assets. My own opinion is that every long-term investor needs to have at least 10 per cent exposure to the energy sector in some form or another, even if that exposure is through the picks and shovels engineers. In my own portfolio, Kentz's shares have bounced back 15 per cent as has US oil equipment tracker IEZ, while US oil services supplier Noble has moved up by 11 per cent. I'm also pleased that shares in BG are up 8 per cent in the last three months and I think they'll move even higher, with a medium-term target price of £12.50 a share.
My only real disappointment has been African agricultural minnow Agriterra, which has fallen substantially in value in recent months and continues to trade around cash - I'm completely unfazed by this market disinterest and remain a long-term bull, especially as the Mozambique beef business starts to ramp up in the next six months.
Getting ready for a reversal
So, all in all, a decent three-month return from my pension portfolio, yet the contrarian in me continues to worry about a reversal later in the year. Risky equities are probably the least worst of a bad bunch, but when you look at charts produced by the likes of US economist Robert Shiller (www.econ.yale.edu/~shiller/data.htm), you quickly realise that US equities in particular represent fair value at best, and even that assumes a sharp uptick in US corporate profits - data for measures such as the long-term average of earnings versus the S&P 500 index (called the CAPE measure) show that US stocks are valued at 22 times profits. I fully accept that some analysts are being a little too pessimistic about the likely pick-up in US earnings, but I struggle to find much value in the US. In the eurozone, by contrast, there are more value opportunities – although not as many as there used to be - but I'd still be cautious about the long list of austerity-fuelled political pratfalls.
The fact that I'm cautiously optimistic doesn't necessarily match my cash levels, which are running at recent lows at 10 per cent of my portfolio - that kind of number would suggest that I'm close to fully invested. Yet the truth is that within a month one of my structured products (from Merrill's) matures, which will kick back in another £8,500 in cash, taking me back to around 20 per cent. I can't help but think that investors should be ever so slightly fearful of this politically induced rally and still keep their powder dry with some extra cash - just in case.
That maturing investment from what was Merrill Lynch also brings me to my next observation, which is that investors should intelligently consider using structured investments. Way back in 2009, I bought a line of stock in a number of structured investment trusts, all of which have done me proud. Structured products have their critics (lots of them), but all I can say is that my experience - reported in great detail on these pages - has been largely positive. That's because I've treated structured investments with the same due diligence and value considerations as I would any other investment opportunity. At the moment, I'd be looking carefully at any defensive autocall where an annual payment (of between 7 and 8 per cent a year) is triggered even if the stock market starts falling in value. Personally, these structures seem to me to offer better value than many retail bonds (which are beginning to look expensive to me) and absolute-return funds.
Talking of the latter (absolute-return funds), I've decided to make two key moves - I'm going to sell my units in the Barclays Celsius RADAR fund, which I bought into a while ago when strategist Tim Bond was in charge. This is meant to be a retail-friendly alternative to the more specialist hedge funds, but the manager left shortly after it was set up and the fund hasn't really gone anywhere in the intervening period. Frankly, I'm disappointed. I'm also - more controversially perhaps - looking to slowly reduce my (16 per cent) exposure to infrastructure funds. Rather like the retail bonds I mentioned earlier, I think this small coterie of listed-London funds is beginning to feel a touch overvalued and in particular I'd quite like to take some profits on the 3i Infrastructure fund.
On the positive side I've started drawing up a new 'wish list', so to speak, consisting largely of existing positions in my portfolio that I'd like to increase. As befits my optimistically cautious longer-term view on equities, I think now is the time to slowly drip-feed money into value-orientated funds and managers - my own way of accessing this is through the Quality and Income index tracked by the quantitative team at French bank Societe Generale (led by Andrew Lapthorne), investable through a note and exchange traded fund (ETF) listed on the London Stock Exchange. This carefully screens the market for individual company stocks from around the world that meet a number of stringent criteria and, while I wouldn't expect the index to go through the roof, I do think it might preserve capital better if markets pull back a little later in the year.
On a more positive note, I think that the recent spate of big claims on the catastrophe reinsurance front - the New York hurricane being the real biggie - must force a fundamental change in the natural disaster insurance sector. Reinsurers can't keep bailing out the US eastern seaboard for disasters and premiums must start rising, which is why I think now might be a good time to slowly increase my exposure to the reinsurers through the DCG IRIS fund run by a team at Credit Suisse. Again, this isn't exciting stuff and won't blow the lights out (if you can excuse the pun) but I think it reasonable to expect a 6 to 8 per cent annual return through the long-term cycle, with 5 per cent a year paid as income.
Sticking with the future opportunities, I'd also quite like to increase my exposure to the US regional banking sector through the iShares Dow Jones US Regional Banks ETF. I'm no great enthusiast for banks, but I would argue that the US housing market will surprise us all by the strength of its rebound. That's probably good news for the regional mortgage and consumer credit banks, most of which are reasonably valued on the US markets. And if US banks are really your thing - and you fancy an adventurous punt - I'd keep a beady eye on shares in Morgan Stanley, which have lagged peers such as JPMorgan - Dan Loeb's Third Point has alighted on the Wall Street outfit as its next 'target' and I think the hedgie could be on to something, with the shares valued at just over 11 times estimated 2013 earnings.
View the latest breakdown of David Stevenson's Sipp portfolio.
