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Moving into cash

David Stevenson is worried where equity markets may head in the short-term and is happy to sit on cash for now
August 29, 2014

Over the last three months my self-invested personal pension (Sipp) advanced by 1.92 per cent, which is about what I hoped it would do, compared with a small decline for the FTSE All-Share Index of leading UK equities and a gain of more than 3 per cent for global developed world equities. My portfolio of shares and funds also cruised past the important psychological barrier of £100,000, hitting a total combined value of just over £101,500.

This relatively small upward movement in the value of my pension pot masks some important developments at the portfolio level, namely that my cash levels are now up at over 26 per cent. My cash reserves have benefited from a number of realisations including my decision to tender up all my shares in BlueCrest BlueTrend (BBTS), the takeover of Kentz (with a 400 per cent-plus gain) and the redemption of my InCapital Structured product - on that last realisation I would simply note that every one of my structured products has more than delivered for my portfolio. And I suspect that that cash number may go even higher as yet another closed-end fund within my list - the reinsurance based specialist DCG IRIS (IRIS) - looks to wind-up towards the end of the year. In fact, I can easily see my cash levels going up to 30 per cent, with my net effective exposure to risky equities running at around 60 per cent of the total portfolio value.

I'm comfortable with those numbers largely because I'm a tiny bit suspicious of equity markets as we head into the all important autumn months. Although I remain cautiously bullish about equities in general over the medium term, I think there's grounds for some concern about the short term. Put simply, the opportunities for careful, good value reinvestment simply don't exist. If I look around global risky assets in aggregate, most are highly priced with very few obvious 'value opportunities'. I'll probably carry on increasing exposure to emerging markets on a drip-feed basis (equivalent to about 0.5 per cent a month over the next 12 months) but I think there's possibly more bad news to come from China in the autumn.

US equities look very overpriced in my view and I don't see that the eurozone is the obvious 'slam dunk' many make it out to be, although I think there are some pockets of value lurking around. At an asset class level, I'm optimistic that the commodity cycle has turned but also think that oil prices by contrast will fall back in the next six months. As for bonds, I can't quite see why I'd want to put new money to work in an asset class that must be (negatively) impacted by the prospect of (small) interest rate increases. So, all in all, I see very little to be enthusiastic about and plenty of room for market mischief, not least as geopolitics raises its ugly and unpredictable head.

My bottom line? I won't be rushing to reinvest my cash for the moment and will be sitting tight waiting for some big jumps in market volatility before I head back into equities in an aggressive fashion.

This caution doesn't mean that there hasn't been a small burst of activity within my portfolio - those redemptions and realisations notwithstanding. I have acquired shares in a new business - tech venture capitalist Allied Minds, which listed on the London market back in the early summer. I was alerted to this stock by a good friend who reminded me that one of its biggest shareholders was a certain Neil Woodford, formerly at Invesco Perpetual and now at the helm of his own fund. Mr Woodford has a long and very successful track record of backing university-based tech spin-out businesses and here in the UK we are blessed with some quality, listed venture capital vehicles including the IP Group (IPO) and Imperial Innovations (IVO). Allied Minds is in a similar mould to IP and Imperial in that takes the best academic research and spins it out of the hallowed halls of academia, but it boasts an important twist - it works with US-based academic institutions as well as the Department of Defence. This careful and strategic approach to tech-based venture capital strikes me as a brilliant long-term innovation and even though Allied Minds' shares have shot up already, I think we may see even bigger gains over the long term - partly driven (I hope) by portfolio realisations but also by US investors realising that Allied Minds actually exists and is a smart way of buying a diversified portfolio of tech businesses.

I've also purchased some exchange traded notes or ETNs (similar to ETFs) in a new equity income strategy from a hedge called Hinde Capital - their ETN was issued with French bank Societe Generale back in the early summer and is aimed at systematically capturing dividends and dividend growth among FTSE 350 stocks. Crucially, the strategy is run on a 50 per cent hedged basis, which means that the managers are also trying to limit the downside on the portfolio. This ETN sits nicely alongside a not dissimilar ETF also in my portfolio, again issued by SocGen/Lyxor called the SG Quality and Income strategy - this also looks to target global dividend paying equities in a systematic way but is not hedged on the downside. Over the long term, I'd like to consistently increase the dividend focused portion of my Sipp perhaps to as much as 25 per cent of my total portfolio.

My other big acquisition focuses on one of my worst timing decisions of recent years - buying shares in contrarian mining investor Praetorian Resources. I've been waiting for the commodities cycle to turn for some time and bought some shares in this specialist fund, attracted by its impressive managers and its obviously contrarian focus - ie, investing in cash-strapped small-cap mining stocks looking to increase or even start output. Sadly, that was a disastrous move as commodity prices headed lower, and sentiment towards under-funded small caps turned from merely bearish to downright hostile. Praetorian's shares collapsed in value and I lost a sizeable amount of money as a result. But I have - perhaps mistakenly - now decided to double up on this bet. None of the original drivers have changed or vanished except that commodity prices look like they might have bottomed out and some small-cap share prices have started to show (small) signs of life. So, in true contrarian spirit, I have doubled my shareholding in this fund!

In terms of other notable activity within my portfolio, I've ended up with new shares in recently demerged Paragon Offshore (part of oil equipment services giant Noble). Within the existing list of holdings my patience in Ecofin (ECWO), a utilities and infrastructure focused fund, has been rewarded - the shares are up 11 per cent over the last three months, 31 per cent for the last six months, 45 per cent in the last 12 months. The share price of the Biotech Growth Trust (BIOG) has also rebounded sharply, partly as investors recover their nerve and start reinvesting in the biotech sector - my shares have rallied 20 per cent in value in the last three months. Last, but by no means least, Asian and even Chinese shares have shown some signs of life, which has helped my investment in the Schroders Managed Asian Total Returns Trust, up 10 per cent over the last three months (again, as with Praetorian I have doubled up my holdings in this fund over the last year).

In terms of losers and laggards, only two stocks warrant mention - African agriculture play Agriterra continues to plummet inexplicably in price while P2P lender TrustBuddy (Swedish listed) has given up some of its recent gains as investors worry about growing regulatory risks, especially in Denmark which is a key market for this still fast-growing business. I'm still hugely confident about TrustBuddy and if the shares continue to fall back I may top up my holdings again.

Finally, I've finished off my summer review - this is a small project to investigate new medium-term investment opportunities, which involves putting new companies onto my already extensive watchlist.

Currently I'm focusing my efforts on three main themes:

■ Hard assets-backed businesses which might benefit from any sharp upwards move in the price of precious metals. This small group now includes a gaggle of North American-listed specialists such as B2Gold, Sandstorm Gold, Excellon Resources and Altius.

■ Energy-focused stocks that represent good value - this list includes UK-listed energy private equity play Riverstone, as well as US-based Comstock Resources, Rowan, TAG Oil, Zargon Oil & Gas.

■ Tech-based stocks mainly in the US with significant upside potential, including Regado Biosciences and GSV Capital.