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Sipp Diary: rocky resources

David's Sipp has been buffeted by the emerging market sell-off and his exposure to resources - although he's still bullish on the long-term prospects for both
March 13, 2014

It's been another slightly exasperating few months for my self-invested personal pension plan (Sipp), with a gain over the last three months of just 0.5 per cent against an increase of just over 1.5 per cent for the FTSE All-Share index. I'll return to the source of this underperformance in a moment but the short summary is that I'm getting buffeted by my long positions in the resource sector and - to a much lesser degree - in emerging markets. It will come as no surprise that I take this recent poor performance as a sign that I should actually increase my holdings in both.

But let's start with the good news, and three top performers - two familiar names, as well as a novice. The biggest gain was a recent investment in Swedish peer-to-peer (P2P) lending platform Trustbuddy (Sw: TBDY), which increased by 89 per cent over the last three months, an exceptionally gratifying gain. But I think there's much more to come from this Nordic raider and I note that a few weeks ago it raised another chunk of money to help it grow even bigger. Mark my words that when the big US P2P platform Lending Club finally hits the US markets investors will start to rerate this business - its already growing fast, is profitable and has a fantastic way of using social media data to boost business. Any fall back in the price will see me adding to my position.

The more familiar successes over the last three months consisted of oil equipment services business Kentz (KENZ) - up 30 per cent - and Biotech Growth Trust (BIOG), which was up 24 per cent. I have to say the profits on both have been extraordinary and I struggle to believe that the share price of Kentz will go that much higher. With the Biotech Growth Trust I think 2014 could be another excellent year for switched on biotech investors, especially as merger and acquisition activity in the sector becomes almost feverish (despite what can only be described as stretched valuations).

So, that's the good news. The bad news is that I am bleeding money from my roughly 21 per cent exposure to the energy and mining sectors and my near 8 per cent exposure to emerging markets (that number includes Utilico Emerging Markets (UEM) which I technically classify as an infrastructure stock). Those losses have accelerated because of two very determined additions to my portfolio in the last few months - I have doubled up my holdings in the BG Group (BG.) and in the Asian Total Return Investment Company (ATR). BG Group sank 13 per cent in value over the last quarter and the Asian fund was down a slightly more acceptable - but still quite hefty - 9 per cent over the last quarter.

 

That kitchen-sinking feeling

The reasons for these dramatic falls are well understood. In the case of BG Group lots of horrible news - including the impact of political instability at its Egyptian operations and the declaration of force majeure on its contracts there - news has hit investor confidence badly. However, one gets the sneaking suspicion that the new management team is engaging in an elaborate exercise of 'kitchen sinking' all the bad news ie getting rid of all the legacy problems inherited from the old management in one fell swoop. The Asian trust, meanwhile, is getting poleaxed both by concerns about emerging markets and nagging fears that China's attempt to deleverage and restructure its economy might backfire and turn into a genuine slowdown.

I'll address the China question shortly but I'm not remotely concerned by any of the above. I still think BG Group has a priceless set of strategic assets worldwide which eventually someone will pay top dollar for. As for Asia, I'll be pretty much continuously adding to my positions over the next few months as local markets continue to sag - and the Asian trust is managed by a highly rated team at Schroders.

In this vein I'm also keeping a beady eye on an excellent new closed-end fund launch about to hit the London market involving Sniper Capital and its new logistics property fund. This outfit runs a Macau property fund which I foolishly forgot to invest in a few years back and ever since I've been kicking myself for the missed opportunity. Its China Logistics fund offers a winning combination of income and capital gain and should appeal to any emerging markets investor who wants a focused play on consumer spending with the security of local, Western managers who have deep experience in the region.

 

The cheap will get cheaper

Which brings me back to emerging markets and China. What really matters for emerging market equities is the flow of capital - if investors pump money in, prices go up and vice versa. The brutal truth is that investors are running very scared at the moment and are withdrawing capital at a feverish rate. What's also not helping is that the Chinese are engaged in a form of monetary contraction as they try and control bad debts and restructure their economy. The net combined effect is that emerging markets are bleeding money and prices are pushing ever lower. I may shout until I am blue in the face that emerging market equities are cheap, but it simply doesn't matter in the short term. Those emerging market equities may be very cheap, but they will get cheaper.

I even think there's an outside chance that China may experience a harder landing in the first half of the year than we all expect. The bottom line - we still have a further decline in values of between 10 and 20 per cent before this is all finished. I will be quietly buying into these declines, starting first with funds like the Asian Total returns trust (it has a more avowedly absolute returns perspective) and then more aggressively via Chinese local equity market exchange traded funds. On balance I think we are mid way through a growth scare in which investors get jumpy about systemic risks before settling back and enjoying the boost to global growth.

As for commodity markets, including oil prices, I'm still a long-term bull, although I'm currently much more bullish about industrial metal prices - oil prices might continue to slide back by another 5 or 10 per cent before the current phase of contraction is finished. Nevertheless, I don't regret any of my investments in this space although I am increasingly perplexed as to why Praetorian Resources (PRAE) has fallen quite so calamitously out of favour - beyond the obvious explanation that it is investing heavily in small cap precious metals miners who are in desperate trouble at the moment. Half of me is tempted to buy some more shares - currently trading at 7.5p versus a NAV value of 18p - whereas the more rational side of me says I should cut my losses and run.

 

Hedge fund headache

One last observation - on Bluecrest Blue Trend (BBTS), a recently listed CTA hedge fund that has had quite the most catastrophic recent performance imaginable for what is supposed to be an absolute returns strategy! If I were a fellow CTA fund manager I'd be outraged that this fund has now entirely queered the pitch for any other listing of a managed futures fund for the rest of the decade. The discount is now widening and I've talked to a number of investors who believe that "something needs to be done" and fast. What's much more interesting is that hedge funds overall are really struggling in this new economic environment where worries about tapering seem to be coming to the fore.

Yet in truth it's not just hedge funds that are up against it - even many value orientated managers I talk to are extremely worried, with no obvious opportunities and extended valuations in developed world markets. In summary, many stockpickers and active fund managers (outside of obvious growth stock opportunities) look like they are struggling to make a difference and that's a source of growing concern for me. Maybe I'll leave my cash levels at 10 per cent and look to add a small amount by cutting some losses and taking some profits.

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