Moving out of cash

But that guarded optimism for equities over the long term shouldn't in any way be confused with enthusiasm for the state of the US or UK stock markets as we finish a soggy 2012. Equally, it's not an affirmation that we're 'out of the woods', having escaped the grim menace of a euro break-up, the US dropping off its 'fiscal cliff' or military flare-ups ranging from the Middle East to the South China Sea.

Wall of worry

If I had to take a position on a benchmark index such as the FTSE 100 I'd probably say that it (and the S&P 500) will drift lower over the next few months as volatility starts to bubble up again, especially as investors become more nervous about what the politicians might get up to next.

But I need to add a big caution at this point in the discussion around market volatility. I've been thinking that volatility as measured by indices such as the VIX (tracking the daily variance of the benchmark S&P 500 index) was due its day in the sun for months and actually bought a volatility tracker issued by Source and Nomura with the ticker VOLT. I thought that as the wall of worry grew taller, volatility would crank up... but I was wrong and volatility stayed low. That led me to dump my holding in this tracker after a small but painful lesson a few weeks back.

But I continue to believe that volatility will rise in the next few months. I seem to be the only investor left alive who doesn't think the eurozone will implode, but I do think the eurozone economy generally is in dire straits as a result of austerity. Although I stick to my view that Spanish equities probably represent good value in the long term, I'm quite willing to concede that an index such as the IBEX 35 (which represents the major Spanish stocks) will probably continue to drift lower. Blame stroppy citizens (quite rightly appalled by colossal unemployment), irate Catalans and generally fiscally lax regional governments. I'm also more than a little perturbed by the growing sense that France is next in the bond vigilantes' firing line, a view first propounded more than a year ago by Societe Generale's influential equity strategist Dylan Grice.

Political suicide

So I'd expect more fun and games in 2013. In the short term I'd also be very worried by the capacity of US law makers to keep pushing their economy towards the fiscal cliff - and then averting catastrophe at the last moment. Perhaps most important, I'm a little worried that the global equity markets have finally woken up and realised that QE3 won't actually serve much purpose and that we're stuck in a low-growth rut. So, if I had to nail my colours to the mast, I'd say that the FTSE 100 might test 5500 and possibly even 5250 over the next three months.

But I stick to my long-term bullish guns by saying that many equities appear decent value and if I wanted to own something (other than cash) I'd want a nice mix of decent good value or quality equities.

Looking at my own self-invested personal pension (Sipp), it's up 3.8 per cent since the last time I reported on it in early September - that's against a fall of 0.63 per cent for the FTSE All-Share. At the individual stock level, the star performer has been Utilico Investments, which has increased by 20 per cent over the last few months – this slightly odd closed-end fund invests in a mixed bag of gold miners and utility companies. Shares in Aurora, a deeply unloved Russian-focused private equity fund are up 11.73 per cent over the same period and I have nearly doubled my holdings in recent days. This London-listed fund has been a dog of epic proportions but its core gaggle of Russian mid-sized private companies within the portfolio is growing at a more than decent rate. I still think it's a good bet for the truly adventurous willing to sit tight for the next few years. As I promised in my last report on my Sipp, I've also picked up shares in Japan Residential Investment Company - this has increased by about 10 per cent over the past few months, although I only picked up shares in this little-known and decent-yielding fund a few weeks back.

Probably the biggest single contribution to performance over the last few months has been my small but important collection of structured products. Now if you talk to critics of these allegedly exotic investments like Mark Dampier at Hargreaves Lansdown, structured products are not to be trusted, complex and opaque. My own experience is quite the contrary, largely based on detailed research and careful selection - many structured products are indeed rubbish but then again I wouldn't say that I'd want to own every FTSE 350 stock (far from it, in fact).

My shares in structured funds run out of what had been Merrill Lynch (through its Elders platform) have all served me well and produced very decent profits as well as kicking in solid income flows on a regular basis. To use one typical example - I have a hefty stake in a mysterious sounding structured product called Elders 7 per cent Fixed Income Shares - series 24B. These Merrill Lynch shares track the FTSE 100 and are up 22 per cent since I bought them yet have also been kicking in an income of over 8 per cent a year for many years, giving me a decent total return. They're still tracking the UK market so could go much higher in the next year and possibly even hit 90p or even 95p before they redeem.

BG Group is the latest company to join David's energy mini-portfolio.

Equally, my shares in Incapital Asset Allocation plan have performed more than adequately and were recently valued at £1.248 a share versus the issue price of £1 back in 2008. I'm not saying these returns have shot the lights out but I think that many investors would have been better served by a decent structured product (assuming you know how to find one) than a typical absolute returns or hedge fund, where charges are huge and performance a tad disappointing.

On that subject, my investments in hedge funds continue to generally go nowhere although to be fair Brevan Howard's Macro fund has had a decent run over the last few years. Shares in the 'hedge fund-like' Celsius Radar Fund from Barclays have also flatlined for a year while BlueCrest BlueTrend (a Commodity Trading Advisers managed futures fund listed on the stock market) has gone down markedly in value like many of its rocket scientist peers. It's not all boredom and misery among the hedgies, though, as shares in US-focused Third Point Offshore have had a good few months and are up just under 9 per cent since early September.

Beefing up returns

Turning to the rest of my portfolio, oil and the oil & gas services sector continue to disappoint but I'm still a long-term bull and will pick up quality stocks when I see them. The latest company to join my energy themed 'portfolio within a portfolio' is FTSE 100 major BG Group (BG.), which is having a rough time. Its short-term challenges are legion and I wouldn't be surprised to see the shares drift even lower, but I continue to believe this is a world-class company with great strategic assets in the right sector for long-term growth.

Last but by no means least, my biggest disappointment has to be another recent entrant to my portfolio, Agriterra (AGTA), which continues to slide south in price. This is an Africa-focused agriculture play, and I focused not least on the huge dollop of cash on the balance sheet following its disposal of East African oil development rights. My sense is that we're still smoking out the oil bulls via a constant drip-drip of sell orders and that sooner or later the market will wake up and smell... the sizzling beef on the barbecue, derived from the company's growing Mozambique beef operations. If the price drops below 3p I might even top up on my holding.

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