Sipp sails through rough seas

In truth I can’t point to much good news in terms of individual share price movements. The table below shows the main advances in share price terms over the quarter, with the Biotech Growth Trust (BIOG) bouncing back 22 per cent in just three months. Infrastructure funds have also had a good few months, although I’m rather of the view that they are beginning to look more than a tiny bit expensive at the moment.

Winners in my Sipp portfolio

In terms of ‘losers’, there shouldn’t be any surprises once you look at the next table below – it shows those stocks with the biggest price decline in the last three months. Guess what? It’s dominated by commodity equities. Again it doesn’t take a genius to work out what’s gone wrong here. Oil prices have plummeted and mining stocks have been hit hard by worries about China’s economy.

Now at this stage I have to own up to a terrible set of calls earlier this year. I managed to convince myself that the commodity cycle had in fact bottomed out. How wrong I was. In fact I now think there’s worse to come. Energy markets have become hyper-financialised which means that non-economic players have started to become crucial in setting price expectations. That’s happened at the same point as US shale gas and oil floods the Western hemisphere.

These developments mean that oil prices tend to overshoot on the way down as well as on the way up. Oil should never really have been priced above $120 a barrel at its peak but I also think that we could see oil prices hit $50 for WTI US crude. That’ll cause all sorts of mayhem, especially for the Opec nations, and Brazil and Russia. Overall, though, I think it's excellent news for the global economy.

Looking at other commodity sectors I think copper is probably going to fall back by at least another 10 per cent and iron ore prices look incredibly vulnerable especially as China will – I think – surprise on the downside in the immediate short term. As for gold prices I still think we’ll see $1,000 an ounce tested, partly driven by the rush into dollar based assets.

So, plainly I think there's more pain to come for the commodity sector. Yet despite my short term caution I am looking to top up my holdings within the sector. In fact I intend to purchase two funds – the first is a trust called Riverstone Energy (RSE) and adopts a private equity approach to energy assets in conventional markets. I think this fund has the perfect environment to invest its large mountain of cash in great, cheap projects so I shall buy £2,000 of shares. Secondly I’m investing in a specialist small-cap focused mining fund called Baker Steel Resources (BSRT). The highly regarded managers at this London listed investment trust say they’re seeing lots of high quality assets going cheap and are looking to raise cash to buy assets now! My plan is to invest another £2,000 in this fund.

Losers in my Sipp portfolio

I’d describe my current medium to long term outlook as bullish. For me equities, especially those that produce an income and are relatively cheap (with decent balance sheets) are the best bet for the long haul. I also think that the eurozone will surprise to the upside in 2015 as will the US and the UK. I even think that Japan has momentum behind it (though its structural problems remain) and the falling oil price is a great tonic for the world economy.

But I am also cautious. Falling oil prices spells geopolitical mayhem. The Russian bear is in a corner and feeling impoverished, so god knows what it’s capable of. Investors will also continue to probe the determination of both the Chinese and eurozone authorities to boost growth – although I think both will eventually produce the goods in terms of policy outcomes. Lastly I suspect that US assets will continue to appreciate in value as investors seek out quality assets – pushing US shares to expensive valuations.

New ideas?

So, given this big picture view – cautiously bullish– are there any new investment opportunities that have caught my eye?

First of all I’d return a favourite subject in these pages – the fast growing world of alternative finance. Growth rates in this sector are remarkable but the competition is also hotting up. Rumours abound that the planned IPO of leading US platform LendingClub has been delayed or even aborted which might suck some enthusiasm out of the system but I still think this is a sector to watch out for.

I already access the space through Sweden-based outfit Trustbuddy (Swe:TBDY) which only a few weeks back announced two big deals that will take it out of its core short term consumer lending product set into mainstream consumer and business loans. If this transformation works, the share price could shoot up again. For the time being though I’m going to focus instead on GLI Finance (GLIF) which has perhaps the biggest portfolio of platforms in this sector but also produces a dividend yield of 8.5 per cent. As long as it can keep paying a decent yield – it lends money on platforms to generate an income – it should be able to cover that yield while the equity invested in any platform is effectively an upside option. I’m going to invest £2,500 in GLIF.

I’m also going to put £5,000 to work in a specialist hedge fund called BH Credit Catalysts (BHCG). Although hedge funds haven’t done terribly well and bonds (which this fund invests in) aren’t exactly cheap at the moment, I think the team behind this small fund has built a great track record and it should be able to make decent profits if bond market volatility increases ie the team aims to make money both from long and short bond prices. My central hunch is that bond market volatility will increase markedly in the next few years as the US Federal Reserve starts to slowly scale back its interventions. So another £5000 is making its way to Credit Catalysts.

Back in the core equity space I really like the look of a clutch of new ETFs issued in Europe by US firm Wisdom Tree. Their dividend focused strategy fits in nicely with some existing funds/products in my portfolio including the SG/Lyxor Quality Income fund (SGQL), the SG Hinde Capital ETN (HALF) and the SPDR S&P UK Dividend Aristocrats (UKDV). In terms of Wisdom Tree’s new products I’m looking at two new funds:

1.The Wisdom Tree Emerging Markets Small Cap Equity Income fund (DGSE)

2.The Wisdom Tree European Small Cap Dividend Fund (DFE).

Overall I’m keen to skew a large part of my equity investments towards dividend focused strategies/funds and I’d like to do that in both the European space and the global emerging markets sector. I’m still confident that emerging markets – especially Asia – will outperform in the long term but I think smaller businesses will do better than their larger peers, whilst a focus on the dividend income might help manage some of the inevitable downside risk.

As for Europe I think the same focus makes sense – smaller caps, but focused on those that pay a decent dividend. The Wisdom Tree ETFs are widely used in the US and their introduction into the UK is a great bit of news, especially as the expense ratios on these funds are fairly competitive. Following on from my earlier comments, I’m not in a rush to invest but I think these two ETFs will find their way into my portfolios within the next three to six months.

That caution about markets prompts my last buy. I am keen to manage my downside risk especially as markets become much more volatile. Traditionally hedging your downside risk has been a tricky and expensive exercise for stock market investors – spread betting seems to make much more sense.

But SG has just brought in its range of Infinite Turbos which very effectively deal with two very big challenges facing DIY investors using derivatives based products. First, there’s what I suppose one could call the time leakage problem – this occurs with any options based structure where your contract loses value every day as it moves towards its redemption date. I’m useless at market timing and have a terrible record at spotting key market moves, so I like to keep any potential hedges ‘open’ – a real problem with this time decay.

These Infinite Turbos have done away with this issue as they are ‘infinite’ ie timeless. The other big risk is that the day to day pricing of many options based structures is massively impacted by market volatility ie as volatility shoots up and down it has a big effect on your product price. Again these new Infinite Turbos do away with this risk after you’ve bought them.

So my plan is that I’d like to hedge only 50 per cent of my portfolio – the rest of my holdings are in cash or in bond/hedge funds which arguably should increase in value if equity markets bomb. In addition I only really want a limited 50 per cent hedge on that 50 per cent exposure ie. I want to hedge 25 per cent in net exposure.

I’m going to invest £1,000 in an Infinite Turbo with the ticker MF37 – this tracks the benchmark US index the S&P 500 and makes money if the index goes down. The gearing is just over sevenfold and the knockout is based on the S&P 500 index hitting 2442 (it’s currently around 2000). This latter term means that the product will have no value if the benchmark index increases past 2442 – not in my opinion highly likely in the next year or so. As the S&P 500 declines in value you benefit from that leverage of 7.5 times ie if the S&P 500 falls by 5 per cent the product increases by 50 per cent.

Clearly I don’t want to waste too much capital on this form of hedging which is why I’m only putting £1000 to work over the next year or so. My calculation is that this product could end up being worthless, because markets have shot up 20 per cent but I’d also benefit from a 10 to 15 per cent increase in the value of my equities. On the other hand if markets do fall 5 to 10 per cent, all that gearing will work to my favour and the product will shoot up in value.