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So over exuberance

David Stevenson makes changes to his Sipp portfolio, prompted by concerns over toppy valuations
June 12, 2015

Another busy three months for my self-invested personal pension (Sipp), with yet more spring cleaning as regards my holdings, some important additions to the portfolio and a decent set of positive returns. Overall, about a third of my portfolio is now in cash, but 54 per cent of it is still invested in what I would describe as ‘risky equities’ – the rest is in relatively safe bonds, market-neutral hedge funds, or in market shorts (more on that later). So, given this net exposure of just over half of my portfolio to risky stuff – ie, equities – I’m chuffed at a gain of 1.79 per cent over the past three months, against a 1 per cent return for the FTSE 100 benchmark index.

Over the past few years, I’ve been wary of global stock markets – my concern peaked in the spring of 2015 – but I’ve also wanted to make sure that I don’t lose out on quantitative easing (QE)-infused buoyant markets; all in all this positive gain is more than I can ask for a portfolio that is, on balance, now cautiously positioned.

Major movers

In terms of performance, BG (BG.) has been the star over the past three months, up 18 per cent after Royal Dutch Shell (RDSB) confirmed it was bidding for the group. The bid is effectively worth 1,350p a share (383p in cash and 0.44 Shell ‘B’ shares) and is expected to complete early next year – but the shares are actually trading well below those levels. So I’m staying put and waiting for the full offer before selling out.

Talking of energy stocks, specialist private equity fund Riverstone Energy (RSE) is up 8.77 per cent over the past three months, which is an impressive performance given the uncertainty in this space. Nonetheless, I am sitting tight for now, even though I still think we haven’t seen the worst of the oil sell-off yet – if I was a betting man, I’d say that oil won’t hit rock bottom until the price hits $20 a barrel.

Last, but by no means least, I’m gratified by the steady surge in the value of Sky (SKY), which is up another 5.87 per cent over the past three months. It’s a brilliant, diversified content play in an age where owning both the content and the network it’s broadcast on (including internet assets) is a very valuable strategic asset. I also think it will benefit from surging UK consumer spending in the remainder of this year. On that same theme, I am keeping a watchful eye on ITV (ITV) – which I think is another quality play – with great content and a channel portfolio to die for.

Required adjustments

In terms of changes in my portfolio, I have three main stories to report this quarter.

To begin with, I’ve continued my spring clean-out of positions. I’ve accepted that I had too many legacy holdings, with odds-and-sods stocks bunging up the broad thrust of my investment strategy. So, out went a long list of small-cap stocks, especially in the resources sector, which has been an absolute dog in recent years. At varying points over the past few years I’ve been nearly a third invested in either mining commodity shares or resource stocks, both of which have massively underperformed. Given those holdings, I think any positive return at the portfolio level is something of a triumph.

In truth, though, I’ve also been running with quite a few stocks that have serially underperformed. The latest casualty is Swedish peer-to-peer platform Trustbuddy (Sw:TBDY). I’ll be honest and say that, while this got off to a flying start and is absolutely in the right sector, it has massively underperformed in the past few months. In April, the share price hit my stop-loss levels, prompting an immediate sale. I’m disappointed as I genuinely believe that this is an interesting business, in the right sector, and at the right time – nonetheless, it has to go. Rules are rules. With that stock out of the portfolio I’m now down to ‘just’ 27 stocks, which is probably still a good half dozen too many, but for now I’m happy to sit tight.

Cue my next big shift: taking profits on stocks where I think the markets have got ahead of themselves. I have sold a decent slug of stock in three key core holdings: 3i Infrastructure (3IN), Allied Minds (ALM) and Biotech Growth Trust (BIOG). With each of these I have top-sliced my holdings by between one-third and 40 per cent and then reinvested the cash in some new investments.

My rationale for taking the profits on these stocks is that, while I don’t think we are anywhere near a bubble for tech and biotech stocks, I do think these growth-orientated sectors are starting to look a bit stretched. In particular, I am concerned that the whole tech spin-out venture capital space of which Allied Minds is a very valuable part is looking more than a tad excessive. I’m a long-term fan of outfits such as IP (IPO), Imperial Innovations (IVO) and Allied Minds, but I struggle to justify current valuations. As for biotech, everyone and their dog thinks it’s in a bubble, but I don’t think that the biggest players are that expensive – and it’s these really big biotech stocks that dominate the holdings list at Biotech Growth Trust.

 

The 3i Infrastructure fund is a more counter-intuitive story. In our cautious ‘new normal’ of investing, infrastructure assets are the classic defensive assets, but my sense is that some funds have become a little too popular for their own good. The 3i fund has had some excellent recent investment realisations and has had a fantastic year or two, but I worry that infrastructure funds might be getting a bit too far ahead of themselves as investors chase the income and security they offer.

And, talking of toppy valuations, I have also made some big acquisitions in the past three months. The biggest purchase was Neil Woodford’s Patient Capital Investment Trust (WPCT), where I subscribed for a decent chunk of shares. These have now shot up in value to trade at a near 6 per cent premium even though the fund is nowhere near fully invested yet. I bought into the Woodford fund because I agree with its twin policies of investing in earlier-stage businesses and venture capital (including Allied Minds), as well as betting on boring, big blue-chip stocks that produce an income. But I’m concerned that expectations have been set too high for the fund and I’m tempted to sell and wait for the inevitable disappointment to emerge – and then buy back in again. I should emphasise that I am still a long-term fan but, at 110p a share, I’m tempted to take some more profits.

 

Genuine punts

I’ve also made a rather unusual purchase, of what is now a very small-cap financial services/insurance play called CPP (CPP). I’m sure most readers have heard of this business by now. You almost certainly at some point have been offered its credit card protection services – lose your wallet, ring just one number, with the service paid for by your bank account. Sadly, its dominant position in the market attracted the interest of regulators, who spotted what they thought was clear evidence of mis-selling. Many moons later CPP is in recovery mode. It still can’t sell any new business in the UK – although its international businesses are still allowed to trade normally – and it’s had to completely reshape not only its management team but also the way it does business. As a business it’s very far from being out of the woods yet – and still very much has issues – but I think it might be worth taking a small bet on this recovery play.

My own interest was piqued when Phoenix’s Gary Channon, a brilliant value fund manager I follow closely, effectively helped underwrite the recovery plan with a big cash injection. The shares had collapsed in value and the business needed recapitalising – cue the appropriately named Phoenix and its investment in the business. There’s some evidence that CPP is beginning to get back on track: international sales continue to move ahead, and the business has been completely ‘retooled’ to focus more on those online sales. My perception is that its core product is still valuable and highly attractive if priced properly. The next steps include getting the regulators to lift the ban, investing in new products and turbo-charging international sales growth. The shares were once valued at over 200p, but are now marooned at around 7.5p, which still values the business at £62m. My sense is that if the recovery does work, these shares will be worth a multiple of many times that 7.5p. But along the way there’s a whole bunch of risks. A definite punt.

Hedging overexuberant markets

And talking of ‘punts’, one last new purchase. I’ve long thought about hedging some of the downside risk within my equity portfolio, but until now I’ve held off because I thought either the timing wasn’t right, or the hedging instrument was too expensive. Over the past few months, though, I’ve become increasingly more cautious. I think markets are a little over-exuberant and investors aren’t taking the real risks seriously enough. I still think Greece could go badly wrong, and at the global level I stick to my deflationary view that oil prices could crash to $20 a barrel.

More pertinently, I am concerned that corporate profit growth has stalled and has moved into negative territory in the all-important US market. I think the markets are pausing for breath before picking up speed again later this year, helped by a resurgent eurozone, a (muted) Japanese recovery and determined Chinese government action to avert a rapid economic slowdown after the inevitable Chinese equity market correction.

But the risks are evident and I can’t ignore them anymore. That’s why I have purchased some downside insurance protection in the shape of what’s called Infinite Turbo (MF04). This is effectively an open-ended downside put option that becomes worthless if its reference index – the FTSE 100 – shoots past 7233 in value. But on the downside it gives me 16.8 times leverage – ie, for every 1 per cent decline in the FTSE this product increases by 16.8 per cent. I still believe that investors are underestimating the potential for market turbulence, so a small sub-1 per cent exposure to this gives me some useful downside protection.

StockCodeUnits heldPrice (p)Value (£)Cost (£)Cost per shareG/L (£)% change gain or loss
INFRASTRUCTURE AND UTILITIES
3i Infrastructure Plc Ord 3IN       1,000 167.8             1,678            904 0.90        774 85.6
Bilfinger Berger Global Infrastructure Sicav Ord BBGI       1,512 124.5             1,882          1,635 1.08        247 15.1
International Public Partnerships Limited INPP          818 137.4             1,124            999 1.22        125 12.5
Ecofin Water & Power Opportunities Ordinary ECWO       1,324 142.5             1,887          1,126 0.85        760 67.5
SSE plc SSE          218 1679.0             3,660          2,497 11.46      1,163 46.6
Utilico Emerging Markets UEM       1,439 191.5             2,756          1,960 1.36        796 40.6
DEVELOPED WORLD EQUITIES
Biotech Growth Trust BIOG          300 816.0             2,448            719 2.40      1,729 240.6
CPPCPP      26,174 0.1             2,022          2,022 0.08-         20 -1.0
SkyBSY          284 1056.0             2,999          2,025 7.13        974 48.1
SPDR S&P UK Dividend Aristocrats GBPUKDV          244 1328.0             3,240          2,490 10.20        750 30.1
Allied MindsALM          459 6.1             2,818            907 1.98      1,912 210.8
SG Hinde UK Dynamic EquityHALF            20 103.0             2,060          1,469 73.45        591 40.2
iShares Dow Jones Regional BanksIAT          119 2331.0             2,774          2,015 16.93          16 0.8
Lyxor SG Quality and Income ETFSGQL            26 126.7             3,295          2,908 111.84        387 13.3
Woodford Patient Capital TrustWPCT       5,000 106.3             5,313          5,000 1.00        313 6.3
EMERGING MARKETS EQUITIES
Asian Total Return Investment CompanyATR       1,931 204.5             3,949          3,497 1.81        452 12.9
HEDGE FUNDS / DERIVATIVES
BH Macro Ltd Ord NPV GBPB1NP514          115 2090.0             2,404          1,497 13.02        906 60.5
Third Point Offshore InvestorsB1YQ6R9          242 1635.0             3,957          2,500 10.33      1,457 58.3
SG Infinite TurboMF04       1,766 33.9                599            809 0.46-210 -26.0
RESOURCE STOCKS
Baker Steel Resources TrustBSRT       4,443 0.3             1,111          1,500 0.34-389 -25.9
Noble Corporation            42 11.2                470            628 14.95-158 -25.1
AngloPacificAPF          935 1.0                888          1,620 1.73-732 -45.2
Source Markets Morningstar US Energy Infrastructure MLPMLPS            46 70.1             3,222          2,979 64.77        243 8.2
Paragon offshoreBMTS0J7            14 1.1                 16               -   0.00          16
Market Vectors Unconentional Oil and Gas (US)FRAK            45 1430.0                644            646 14.35-2 -0.3
BG GroupBG          335 1146.0             3,839          3,597 10.74        242 6.7
Riverstone EnergyRSE          395 10.6             4,171          3,995 10.11        176 4.4
BONDS
Royal Bank of Scotland Plc Infln Lkd Nts 01/11/22 B4P95L5       5,400 111.1             5,998          4,938 0.91      1,061 21.5
           71,223
Cash           32,871
Total         104,094
Prices correct as of 29 May 2015