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Nasty surprises

David Stevenson admits to a disappointing quarter, but sees greater opportunities in equities over the medium term
November 29, 2013

I've had a slightly underwhelming last three months, with a small gain of well under 0.3 per cent from my self-invested personal pension (Sipp) portfolio, compared with a 3.5 per cent rise in the FTSE All-Share index. I have to say that I'm not overly worried by this, although my target is to be making between 2 and 2.5 per cent every three months - in truth, I've been hit by some nasty surprises that have acted as a drag on returns.

In particular, shares in Praetorian Resources (PRAE) continue to fall and I have to admit that, in retrospect, the highly-experienced board of directors market timing has to be called into question - the fund was set up with the hope of catching an upswing in valuations for small-cap miners, especially in the precious metals space. Instead, the resource minnows targeted by Praetorian have continued to collapse in value, and the fund probably needs to raise even more money so it can persevere with its avowedly contrarian strategy. I'm tempted to double up on my bet but for now I'm holding back. Overall, shares in Praetorian are down 18 per cent in the last three months.

The next nasty surprise was SSE (SSE), the utility giant. It doesn't take a genius to work out what's the problem, with various politicians threatening hell and damnation - soon we'll be having public executions on Watchdog. I’m fairly pragmatic about the whole affair and I don't think that the big energy utilities will be beaten up, but clearly sentiment is terrible. And if a certain 'Red Ed' does start imposing socialist-style price freezes, we won't only be worrying about utility stocks - all sensible infrastructure investors should probably run a mile. Nasty PFI contract, causing local distress - rip up the contract. Paying too much on a PPP project - change the terms and force lower profits on the investors. I'm not sure this is a road any of us really want to go down, especially when we consider that some of the biggest investors in both the utilities and infrastructure sector are pension funds.

 

Looking at finance alternatively

A new portfolio entrant within my Sipp also deserves a mention - if only because it's declined 21 per cent since I purchased it three months ago. Readers may remember that I have a growing enthusiasm for alternative finance, and specifically online P2P platforms. I genuinely believe this to be a 'next big thing', with the potential to produce huge new financial brands - as we've already seen with Wonga. The problem is that very few of these propositions are run by listed companies - it's mainly the preserve of venture capital and private equity houses. But Swedish-based TrustBuddy is quoted in Sweden, has a reasonable share price and is going places. Unfortunately, it's closely held, a bit illiquid and quoted on a rather unfamiliar exchange for most Anglo Saxons.

 

 

But, at some point next year, the massive US P2P platform Lending Club (investors include Google) will list on the US markets and suddenly alternative finance will join social media as the next sexy thing. Maybe even Wonga will depart our shores and head for a US listing. At that point, I'd confidently expect investors to start chasing the price up of any available rivals, and especially if those players - such as Trustbuddy - can somehow pull of a second listing on, say, Aim or Nasdaq. So for me it's a waiting game, but the good news is that organic growth within the Swedish-based, European-wide business (look on it as a P2P version of Wonga with better interest rates) is incredibly strong, so hopefully some impressive trading numbers next year might also help hoist the share price higher as well.

 

David Stevenson is targeting alternative finance providers.

 

And while I'm on the alternative finance theme (go to www.altfinancenews.com for more in-depth analysis), I think it worth an honourable mention for an old favourite of this column, GLI Finance (GLIF). This Jersey-based small- and medium-sized enterprise financier - which also happens to own a chunk of US credit - has been very active in alternative finance. It's already made two big investments and I suspect more are to come - plus, as investors, you also get a near 10 per cent dividend income. Seems a good bet with upside optionality and a steady income yield.

The last nasty surprise in portfolio terms was oil services giant Petrofac (PFC), which produced some rather disappointing numbers - there's no getting away from the fact that these numbers weren't pretty, but nothing has changed my view of this superb global player and if there's any more weakness I might top up again.

 

 

Don't change the channel

Looking down the portfolio list of holdings, I'd also make a few observations about some other 'cause celebres' that feature as holdings in my fund, including BSkyB, whose shares crashed in value after BT won contract to screen some European Champions League games. It’s obviously not good news that everyone's 'favourite national telecoms network' is ploughing so much money into competing with BSkyB, but I think that the boys in west London shouldn't be too concerned. BT doesn't have a fabulous customer service reputation (and I speak as one) and I can't see that many customers dumping their existing provider just to sign up for football. And if they do, they might return in a few years time anyway. I think BSkyB will also benefit from simple inertia as it slowly charges more in terms of fees to its incumbent customer base and starts thinking about generating new products that will create value.

 

David thinks BSkyB will continue to score with customers.

 

On a slightly more esoteric note, readers might remember that alternative finance isn't the only alternative thing I'm keen on - I like investment propositions where the ups and downs of the share price have little to do with the business cycle and you benefit from some form of diversification. In that spirit, I’ve been a fan of investing in reinsurance funds and specifically those targeted at catastrophe reinsurance - a fund called DCG Iris (IRIS), managed by Credit Suisse, has made it's way into my portfolio in order to benefit from uncorrelated returns and the possibility of a steady income of about 6 per cent a year generated by reinsurance premiums. Yet, in the last few months, I've become a tad more cautious about this opportunity as it seems like everyone and his dog is readying a reinsurance proposition, with too much money flooding into the market lowering premiums and increasing risk appetites.

In my humble opinion, DCG Iris is one of the most conservative players in terms of risk management. But it could still be derailed if some truly gigantic disaster happened, such as a massive cyclone or hurricane inflicting Philippines-level carnage on a highly insured nation such as the US or Japan.

Looking at new entrants to my Sipp portfolio, apart from TrustBuddy, I've also bought shares in the Asian Total Return Investment Company (ATR) managed by a crack team at Schroders on a - you guessed it - absolute returns mandate to make a profit even if markets are heading lower in places such as China. One of my core 'asset allocation' contentions is that Asian equities - in some particular markets - are becoming very undervalued and I believe that China is beginning to look very cheap indeed. The problem is that it may get even cheaper for a whole bundle of reasons and I think local markets could be difficult to navigate through in the next six months. But be under no illusions: when I talk to contrarian investors, virtually every one of them regards China as the big bet for 2014. For now, I've decided to start drip-feeding money into Asia using experienced active managers and to bide my time - if markets start to rally strongly I'll increase my exposure across the board.

Turning to the macro picture, I'd say that equities are the best place to be at the moment and I'm very long equities overall, with 58 per cent of my invested money exposed to shares, and a further 20 per cent to commodity equities (which do look a bit weak in terms of sentiment); the other 22 per cent of my investments are in either hedge funds or bonds. Overall, my cash levels are running at 13 per cent of total money invested.

Currently, I'm happy with this mix but I think we will see greater dispersion in returns between different markets. I'm growing more cautious of US equities, which I think could be overvalued. But I think UK equities by contrast are reasonably valued while the eurozone and Asia appear good value, in places.

 

Short-term caution

That said, I sense that investors need to tread cautiously in the short term and on that theme I'd observe that one of my favourite managers - Gervais Williams of Miton - recently bought a chunky put option for one of his UK-focused investment trusts. The option was worth a tad under 1.5 per cent of the fund value and was based on the FTSE 100 going below 6000. Having talked to Gervais - who has an excellent track record - I don't think this bet on markets falling is any great 'wake up' sign, with Gervais calling the top. It's simply an insurance policy, made easier by relatively low premiums, but I do think it should make private investors think twice. I'm not saying that equities aren't still a good bet - just that some popular markets might have got ahead of themselves and we might run into a 5 or even 10 per cent correction in the next few months. If that's the case, I think it might be prudent to consider temporarily upping cash levels or buying some cost-effective portfolio insurance, perhaps through a covered warrant or other options-based structure. If the latter insurance idea sounds attractive, then something like SB53, a covered warrant from SG that matures in June 2014 at a 6000 (FTSE 100) strike price might make sense. And while we're talking about Gervais Williams, I can't help but note that Miton's chief executive is doing a magnificent job of turning around this boutique asset manager. If equity markets continue to push ahead, and Miton quietly poaches more experienced managers, its share price could go even higher.

 

View the latest breakdown of David Stevenson's Sipp portfolio.