What a depressing start to the year. Investors were barely back at their desks at the beginning of this week before panic erupted. Over the past few years I’ve usually had a good sense of where markets might go – my overall default position has been cautiously optimistic – but this January I am genuinely unsure as to what might happen next. I think the bears can make a strong case for an impending major correction, prompted by a global economic slowdown. There is the real sniff of fear (and financial cordite) in the air and it’s entirely possible that we could see the FTSE 100 push below first 5500 and then 5000.
Confusingly, I also think that the bulls can make an equally appealing case which says that all the pessimism is entirely overdone, that the US and the UK are looking good, and that lower energy prices represent fantastic news for all of us. I’ve subscribed to this (moonshine?) optimism before in recent months.
In the late summer of 2015, for instance, I thought the market correction at the time was massively overstated and I decided to buy into a fairly hefty upside option (5 per cent of portfolio) in the shape of a DJ Euro Stoxx 50 long infinite turbo from SG.
By October I’d closed that position and pocketed a useful 60 per cent profit, or £3,000. Would I repeat that move now? I’m not sure I would. All the drivers behind the recent market turmoil look as though they might actually intensify in the next couple of months. As I have said all along, I think oil prices will only bottom out at $20 a barrel. I also sense that my optimism in a rebound in China was almost entirely misplaced and that much worse news is probably likely to emerge from the superpower.
I’m currently running at 26 per cent cash overall for my portfolio, with my net effective long risky assets (all investments that are deemed as risky including, obviously, equities) at 62 per cent – the other 38 per cent is either in that cash holding, bonds or hedge funds. I’m probably happy to stay at this level for the time being but, ever the optimist, I might be tempted to slowly start edging that risk percentage up over the next two or three months as more bargains present themselves.
A narrow panic
It would be wrong to assume that every share has had a horrible start to the year. What has struck me about the market mayhem is that many defensive assets, such as infrastructure funds, have largely been unaffected – if anything some have actually increased slightly in price. This makes me think that we’re in what I’d call a narrow market panic. Certain sectors are being hit disproportionately, but not all risky assets are being sold off as one. This gives me some comfort as it suggests that we’re not anywhere approaching a repeat of the global financial crisis in 2008 when everything sold off as one.
In terms of portfolio returns, in the little over three months since I last reported (15 weeks in fact) my portfolio has increased by 1.99 per cent in value against a tiny increase of 0.21 per cent with the FTSE All-Share index and 1.5 per cent for the broader MSCI World Index. Over the past year (from 6 January 2015) I’m down 2 per cent, which is hugely disappointing. Then again, the S&P 500 is down more than 5 per cent, the FTSE All-Share is down more than 7 per cent and the FTSE 100 is down 10 per cent.
Still, benchmarks – useful though they are – don’t really amount to much if what you care about is building a big enough pension pot to retire on. Beating a declining benchmark for a few years might sound gratifying, but you’ll still retire poor if all you’ve experienced are absolute losses.
The problem is to work out what the alternative to these losses might be. Increasing your exposure to bonds is the traditional answer, but these fixed-income securities have gone precisely nowhere over the past year and, with US interest rates almost certain to keep on rising, I can’t see any value in virtually any part of the fixed-income credit spectrum. Gold has also edged lower and let’s not mention the wider commodities complex for fear of scaring the horses. Cash pays almost nothing. What’s left? I suppose the answer is to work harder by researching specific opportunities, stick to your contrarian instincts and look for genuine alternatives, assuming you can find any.
David's Sipp Portfolio
| Stock | Code | Units held | Price (p) | Value (£) | Cost (£) | Cost per share | G/L (£) | % change gain or loss |
|---|---|---|---|---|---|---|---|---|
| INFRASTRUCTURE, UTILITIES and REITs | ||||||||
3i Infrastructure Plc Ord | 3IN | 900 | 170.4 | 1,534 | 904 | 1.00 | 630 | 69.6 |
Bilfinger Berger Global Infrastructure Sicav Ord | BBGI | 1512 | 129.75 | 1,962 | 1,635 | 1.08 | 327 | 20.0 |
International Public Partnerships Limited | INPP | 818 | 137.5 | 1,125 | 999 | 1.22 | 125 | 12.6 |
Ecofin Water & Power Opportunities Ordinary | ECWO | 1,324 | 112 | 1,483 | 1,126 | 0.85 | 357 | 31.7 |
| Schroder European Real Estate Investment Trust Ordinary 10p | SERE | 3,856 | 108.5 | 4,184 | 3,999 | 1.04 | 185 | |
SSE plc | SSE | 218 | 1,480.00 | 3,226 | 2,497 | 11.46 | 729 | 29.2 |
| Utilico Emerging Markets Subscription shares | UEMS | 5312 | 7.75 | 412 | 754 | 0.14 | -342 | -45.4 |
Utilico Emerging Markets | UEM | 1939 | 163 | 3,161 | 537 | 0.28 | 2,624 | 488.9 |
| DEVELOPED WORLD EQUITIES | ||||||||
Biotech Growth Trust | BIOG | 300 | 680 | 2,040 | 719 | 2.40 | 1,321 | 183.8 |
| CPP | CPP | 26174 | 11.50 | 3,010 | 2,022 | 0.08 | -20 | -1.0 |
| Sky | BSY | 284 | 1074 | 3,050 | 2,025 | 7.13 | 1,025 | 50.6 |
| SPDR S&P UK Dividend Aristocrats GBP | UKDV | 244 | 1,155.00 | 2,818 | 2,490 | 10.20 | 328 | 13.2 |
| Allied Minds | ALM | 459 | 4.14 | 1,901 | 907 | 1.98 | 994 | 109.7 |
| SG Hinde UK Dynamic Equity | HALF | 20 | 89.00 | 1,780 | 2,031 | 101.55 | -251 | -12.4 |
| iShares Dow Jones Regional Banks | IAT | 119 | 2,299.00 | 2,736 | 2,015 | 16.93 | 16 | 0.8 |
| Lyxor SG Quality and Income ETF | SGQL | 26 | 119.89 | 3,117 | 2,908 | 111.84 | 209 | 7.2 |
| GLI Alternative Finance | GLAF | 10000 | 1.00 | 10,000 | 2,908 | 0.29 | 7,092 | 243.9 |
| EMERGING MARKETS EQUITIES | ||||||||
| Asian Total Return Investment Company | ATR | 1,931 | 182.25 | 3,519 | 3,497 | 1.81 | 22 | 0.6 |
| HEDGE FUNDS / DERIVATIVES | ||||||||
| BH Macro Ltd Ord NPV GBP | B1NP514 | 115 | 2,005.00 | 2,306 | 1,497 | 13.02 | 808 | 54.0 |
| Third Point Offshore Investors | B1YQ6R9 | 242 | 1,450.00 | 3,509 | 2,500 | 10.33 | 1,009 | 40.4 |
| RESOURCE STOCKS | ||||||||
| Baker Steel Resources Trust | BSRT | 4443 | 0.13 | 578 | 1,500 | 0.34 | -922 | -61.5 |
| Noble Corporation | 42 | 6.51 | 273 | 628 | 14.95 | -355 | -56.5 | |
| AngloPacific | APF | 935 | 0.54 | 505 | 1,620 | 1.73 | -1,115 | -68.8 |
| Source Markets Morningstar US Energy Infrastructure MLP | MLPS | 46 | 43.37 | 1,995 | 2,979 | 64.77 | -984 | -33.0 |
| Paragon offshore | BMTS0J7 | 14 | 0.11 | 1 | 0 | 0.00 | 1 | |
| Market Vectors Unconentional Oil and Gas (US) | FRAK | 45 | 842.00 | 379 | 646 | 14.35 | -267 | -41.3 |
| BG Group | BG | 335 | 917.30 | 3,073 | 3,597 | 10.74 | -524 | -14.6 |
| Riverstone Energy | RSE | 563 | 7.76 | 4,369 | 5,338 | 9.48 | -969 | -18.2 |
| BONDS | ||||||||
Royal Bank of Scotland Plc Infln Lkd Nts 01/11/22 | B4P95L5 | 5,400 | 109.47 | 5,911 | 4,938 | 0.91 | 974 | 19.7 |
| Cash | 26,048 | |||||||
| Total | 100,004 | |||||||
Spreadsheet created at 7 Jan 2016
A stubborn contrarian
Turning to actual portfolio transactions, I’ve had a fairly quiet three-plus months bar that handy profit on a eurozone equities long turbo I mentioned earlier.
In terms of rights issues, I have increased my exposure to energy private equity specialist Riverstone Energy (RSE), opting to increase my holding in an open placing which had been criticised by some as it was launched at a discount to the book value of assets in the fund – the accepted wisdom is to work hard to eliminate the discount and then issue new shares. My logic for this investment remains unchanged. I still think that at some point oil prices will bottom out (around $20 a barrel) and canny operators with cash in the bank will be able to pick up quality assets at bargain basement prices. Riverstone seems to me the cleanest play on this theme, although I have to say that my 15 per cent exposure to resources stocks generally has been a dismal choice over the past year.
But, ever the stubborn contrarian, I think I might start drip-feeding on a monthly basis some extra money into both the Baker Steel Resources Trust (BSRW) and Anglo Pacific (APF) - a mining royalty play – from the spring. The former is still my preferred way to play any rebound while the latter provides a welcome dividend yield, which is currently running at about 14 per cent per year, although I’m not sure it will stay that high for much longer.
One notable addition to the portfolio was a chunky £10,000 investment in a new SME loans fund called GLI Alternative Finance (GLAF). This could be the kind of alternative asset I need in that the fund is targeting an 8 per cent dividend payout by making loans to businesses. This is a classic income-based alternative, but I won’t say anything much more than this as I am a non-executive director in the fund.
Talking of funds, the one investment I am glad I exited sharpish earlier on in 2015 was the Woodford Patient Capital Trust (WPCT). I subscribed for shares in this excellent fund and was very happy to see that stake rise by 15 per cent in value in the space of a few months, even though the fund wasn’t even fully invested. I felt all along that the weighty premium was unjustified and preferred to take the profit and then re-enter at a lower, later price.
The shares are now back below 100p and I think I might start thinking about buying back in again, especially if the current premium (98p versus book value of 94p) tightens to 1 per cent or less. I still think this is a great long-term bet for the patient investor – it’s just that investors previously got a little overenthusiastic.
