My self-invested personal pension (Sipp) has made solid progress and is up 5 per cent over the three months since the end of February. By contrast, the FTSE All-Share has risen by just under 6 per cent over the same period, although my portfolio boasts a large amount of cash and many 'market neutral' funds, so my returns have probably exceeded the market return on a like-for-like basis. On a 12-month basis, my portfolio is up 18.7 per cent and over the past two years it's up 24 per cent.
In theory, I should be happy with a return of over 1.5 per cent a month in the past few months (and 1 per cent a month over the past two years) yet truth be told I'm a bit worried. We're probably only midway through the 'great equity sector rotation', the almost mythical global trek as oversized institutions collectively invest new cash not in bonds but higher-yielding equities. On paper, it all makes sense, largely because rates on cash are so unappealing and bonds are overvalued at best. But it's hard to argue that much of the developed Anglo Saxon world represents great value and even Japan is possibly starting to look a bit frothy - on this score I must admit that I've been too bearish about Japan, although in my individual savings account (Isa) I have a large Japanese small-cap exchange traded fund (ETF) position which has stormed ahead.
This general caution about rampaging bull markets is made worse by my own particular circumstances. I now sit on an even larger pile of cash than normal as a series of my listed structured investments mature - paying out very sizeable profits. This is excellent news, of course, and reminds adventurous types that all those naysayers who think that structured products must inevitably be 'bad' for investors are talking junk. There are good structured products and bad ones, just like any investment option and the key is to find out where the value lies - on this score I'd be a bit cautious about committing too much new money to one of these investments at the moment, except perhaps if I could find a decent defensive autocall which would pay out even if the FTSE retreated below 6000 (which I think is a decent possibility in the next 12 months).
Anyway, the upshot is that I have 23 per cent in cash and more to come - as I write this article I'm awaiting the results of an unusual tender offer from the board of Aurora Russia. Readers will remember that I've been a long-term holder of this small, unloved Russian private equity fund which trades on a cavernous discount to net asset value (NAV). A while ago I topped up my position at around 25p and since then there's been some positive news as a major investment has been sold for a tidy profit. Now the board has decided to buy back at least a third of the shares at 52p a share and I've tendered all my shares - I'll probably only get somewhere around 40 per cent of my holding bought out but I'll still make a tidy profit. After this tender I'll probably sell the rest of my holding as I think we've seen the best of the portfolio realisations. But the bottom line is that my cash holding is likely to push past 25 per cent of my portfolio.
Even though I am cautious about the markets, I think holding a quarter of my portfolio in cash is probably too high and I'd like to bring that down to 10-15 per cent, although that means I've got to buy shares in a market that I think looks a bit frothy. I'll come to my current watchlist shortly, but in the meantime I think I'll probably just top up my existing core holdings, including:
■ Utilico Investments (UTL), which has been a big faller due to its investment in gold mining shares. Bizarrely for a gold bear, I'm growing more interested in the small-cap gold mining sector and this fund has a nice mix of resource and infrastructure assets.
■ I'll continue to increase my exposure to energy, largely through buying new shares in the Deutsche DBX European Stoxx 600 Oil & Gas Sector tracker, as well as topping up existing holdings in BG Group (BG.), which I rate highly as a major owner of valuable strategic reserves, Market Vectors Unconventional Oil and Gas ETF (FRAK), which buys US oil and gas shale specialists, only midway through a massive energy revolution, and perhaps also the iShares V S&P Oil & Gas Producers (GBP) (SPOG).
■ I'll also top up my holding in the SG Quality Index Tracker (SGQI) built around an index devised by the French bank's top strategist, Andrew Lapthorne. This invests in decent value, large, quality companies that produce a dividend income backed by a strong balance sheet. I'll wait for a small market pull-back and then double my holdings in this ETF.
The portfolio
I have to admit that some rather odd stocks have had a good three months. The biggest success for my portfolio has been the Biotech Growth Trust (BIOG), which has romped ahead in the past year, and is up 18 per cent over the past quarter. I'm not sure I'd actually commit new money to this fund - or the sector for that matter - but I'm happy to sit tight.
BH Macro has also had a good few months, especially for a supposedly market-neutral hedge fund - up 17 per cent in the past three months. This advance by a highly regarded hedge fund slightly un-nerves me as it could indicate that the fund is starting to develop equity-market-like attributes.
I'm less worried about that issue with US-based hedge fund Third Point Offshore, which shot up 12 per cent over the past quarter; this is much less of a market-neutral-style fund and is benefitting from a big push into US equities.
The biggest surprise of all, though, has been the 12 per cent advance in the share price of boring utility SSE (SSE) - its progressive dividend policy is a big hit with investors, but I can't help but think that many utility stocks are now starting to look rather expensive.
Over in the losers corner, the standout has to be African agricultural play Agriterra, which is off 15 per cent over the past three months - as I've frequently noted, I find this underperformance bizarre as: a) equity investors are waking up to the potential of Africa; b) African agriculture is hot; c) the shares’ fundamentals are backed by a huge pile of cash; and d) revenues are ramping up. Anyway, I'm happy to be patient for the time being. The other big loser has to be Utilico Investments, which has a big investment in both utility shares and a major Australia-quoted gold miner. For a bundle of reasons, I'm quite relaxed and would actually think about steadily increasing my exposure over the next 12 months to this very opportunistic fund.
The forward view
My big concern looking to the future is that I believe we're now stuck firmly in another 'range-bound market', especially for the FTSE 100 and the S&P 500. At the moment, we're in one of those periodic 'upswings', with equity investors lapping up risk - I'd agree with Andrew Lapthorne's assessment that the "the mood is increasingly turning towards fear of a 'melt-up' in equity prices rather than a collapse back down towards disappointing fundamentals". But like Mr Lapthorne, I’d also suggest that the actual economic fundamentals, while not 'bad', are a bit disappointing and that what we’re currently experiencing at a global level is a simple phenomena of investors willing to pay more in terms of valuations for the same set of lacklustre underlying profits growth.
But this probably won't stop big momentum trades and the two biggest ones at the moment are US equities and Japanese stocks. Inflows, especially from within Asia, into Japanese funds are hitting recent highs and I think that, even after some recent reversals, this bull market has further to run. That's probably good news for Asia-focused investors, especially those with a value focus. I'd quite like to buy shares in a small Asian fund called the Asian Prosperity Fund run by a company called Samarang. Unfortunately, I can't invest in this fund through my Hargreaves Lansdown Sipp, but I have a great deal of respect for the fund's manager, Greg Fisher. Here's his view on Japanese equities, one that I have grudging respect for, even though I'm no Japan bull. According to Greg: "The outlook for corporate earnings across the Japanese market remains excellent but particularly so with the companies invested in by the fund. All have reported better-than-expected results of late, and should continue to exceed expectations over the course of this year. I predict that it will be a refocusing on these improvements that will drive the next move up in these shares, probably around the time of the next set of earnings releases, ie August/September. As I have mentioned before, the fact that our holdings are valued on average at only two to three times EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) provides both a strong margin of safety and potential in the medium to long term for significant upward revaluation."
Inflows, especially from within Asia, into Japanese funds are hitting recent highs.
I also think that emerging market equity valuations are looking especially compelling, with China in particular looking cheap. But I'd also suggest that we might be able to buy these shares even cheaper in the next few months, so I'm willing to sit tight for the time being. In particular, I'm keeping a beady eye on shares in London-listed but Beijing-based Origo Partners, which invests in Chinese private equity and Mongolian resource stocks. I might open a position if the price dips below 9p, at which point it would be trading at a colossal discount to NAV and only three times cash.
Looking at the macro picture, I'd also be very bearish in the short term towards gold. My big bugbear now is that the shiny precious metals stuff was supposed to be a classic low volatility play. Unfortunately, gold has proved to be far from a riskless asset and absolutely not a substitute for cash. That might prompt multi-asset fund managers and wealth managers to trim their gold holdings, which I think could push gold prices even lower, especially if the central banks carry on pumping liquidity into the markets to push the growth rate up. I'd be looking for a new low of $1,250 for gold, which would be terrible news for gold mining stocks and especially small-cap gold miners. Prices will plummet, which will tempt contrarians such as me to take a closer look. And what might be the catalyst in the short term for a new downwards leg? I'd be on the look-out for selling by big hedge fund gold bulls such as John Paulson.
Individual stock-specific ideas
I quite like the look of a new very contrarian London-listed fund called the Weiss Korea Opportunity Fund, which buys cheap preferred stocks in the major local conglomerates based in Seoul. These prefs are neither preferred in terms of security of assets nor especially attractive if you want voting rights in these huge companies - in fact they don't have any voting rights at all. But the shares are cheap and Korean equities generally are cheap. I'll report back on this in the next article.
I'm also growing more interested in Mexico as an investment opportunity - it's a great proxy play on the US consumer market and its new PRI government looks hugely impressive. I'm thinking of buying some Deutsche DBX ETFs that track the MSCI Mexico index.
I'm also keen to add to my resource sector exposure and I've found myself looking at Glencore's shares, which trade at around 10.8 times historic earnings, on a par with rivals BHP Billiton and Rio Tinto. I'm not sure that rating is deserved as I think the combined power of the group makes it look a much more diversified bet.
View the latest breakdown of David Stevenson's Sipp portfolio.
