A miserable summer

Out of nowhere markets have got themselves in a right panic but you don’t quite realise the full extent of that correction until you start to inspect the hard numbers. The last time I looked the FTSE 100 – already a dullard and under performer compared to its racy US cousins – was down a chunky 16 per cent from its most recent high. But the table below reveals a far more unedifying story. It shows that investors who’d left money in the FTSE 100 over the last three years would have seen a return of just 3 per cent, which I suppose isn’t too bad when you consider over the last year the same index is down 10 per cent. The benchmark UK index is now threatening to turn into something of a national embarrassment – I can’t think of any sustained period of time over the last half decade where the UK blue chip index has kept pace with either the US major indices or global developed world measures.

We may not – yet – be in a bear market, but the stats tell us that UK equities have been an unpleasant proposition for quite some time. Luckily my own oddball collection of stocks, funds and bonds hasn’t had quite such a terrible run over the last few years. Since I last updated my SIPP on these pages back at the end of May this year I’ve had to contend with a double whammy. First off those miserable UK equity markets haven’t helped, but my main bug bear has been my over-reliance on resource focused stocks.

Given this grim backdrop a fall of 5.80 per cent in the value of my portfolio over the period since May isn’t too bad, compared to a 14 per cent loss for the FTSE 100 and a 10 per cent fall for the broad MSCI World index. Then again, if I’m honest I should have experienced a smaller decline given that I run a weighty exposure to cash (down at 25 per cent at the moment) and I have lots of defensive orientated stocks lurking in the portfolio list.

How David's Sipp stacks up

Cautious optimism

Turning to my attitude towards valuations, my overall viewpoint has been cautiously optimistic, although I’d probably emphasise more the word cautiously. I have been worried that many markets are or should I say were looking a tad expensive and by the early summer I was fairly convinced that something bad was going to happen. That led me to open a short position using SG Infinite Turbo (MF04) which tracks the FTSE 100 with 10 times leverage on the downside. That position worked a treat but I then foolishly decided to close that position once Greece had begun to fade from view presuming that the time was right for a bull market rally. How wrong I was on both scores. First the markets continued to crash – sadly I’d already closed that bearish option – and secondly the markets have continued to remain bearish throughout the early autumn, with barely a rally in sight.

At the depth of the market panic I decided to switch my speculative position and buy into some leveraged infinite turbos that make big profits on a market rise – I am, remember, cautiously optimistic by nature and although I thought the market was due a correction, I’m still fairly bullish about equities’ relative attractions over the medium term. That led me to buy into a eurozone markets leveraged tracker – another infinite turbo with the ticker MF24 which gives 10 times any increase in the DJ Eurostoxx 50 index. Unfortunately to date I’ve been woefully over optimistic and markets have continued to sink lower. I’m still fairly convinced that this panic will pass and that we’ll see a move up in markets at some point in October, so I’m sticking with this leveraged turbo - keeping my fingers crossed that no more nasty surprises come along.

My own sense is that we may see a curious inversion in the next few months based around the direction of US interest rates. For the last few years investors have panicked at the thought that interest rates would rise, even though the historical evidence is that equities on average have in fact done well following modest increases in interest rates. Following the most recent US Fed meeting, equity markets actually fell after no rates increases were agreed. Curiously, investor’s think the Fed knows something we don’t, and so they’ve concluded that we should all fear the future. The Fed might well conclude that a small rise of 0.25 per cent - well overdue – might be worth the push in October and bizarrely equity markets might even start increasing in value again. Confusing times!

A miserable summer

Back at the (portfolio) ranch my collection of funds and shares has had a miserable few months, with a very long list of stocks falling in value – see the table at the bottom of this article for the full, gory details.

It’s not been a complete disaster and I’ve had one stand out success – CPP the fallen credit card services business that has been in the depths of despair since the FCA decided to get tough after some questionable selling practices. I’ve thought it was undervalued and a respected value investor I follow recently decided to take a weighty stake in the business, betting that this was a classic value orientated turnaround story. It's a view that sounds like it might be working out, with the shares storming up 75 per cent over the last three months. My sense is that there’s a lot more good news still to come.

Many of the defensive stocks in my portfolio have also performed – well – defensively. Hedge fund BH Macro (B1NP514) has not gone anywhere while most infrastructure stocks have fallen by just a few percentage points. The Societe Generale/Lyxor G Q Index Tracker Fund – it’s a relatively new idea which tracks global quality stocks – has also held up reasonably well.

As for the rest of the portfolio well I think we can all guess what’s happened to my commodity stocks. One word should suffice: bloodbath. The most surprising victim has been an ETF from Source which tracks US based, income orientated energy master limited partnerships (or MLPs for short). These tax efficient structures own a chunk of energy infrastructure including pipelines and storage tanks. They’re not supposed to be as volatile in pricing as the shares in the businesses that use them but that doesn’t seem to have stopped the markets from sharply marking down valuations in this ETF. I think this reaction is overdone and might buy some more in the next few months.

Surprise fallers

Two other surprise fallers. I’m a long bull for emerging markets and my favourite play on this theme has been through the Utilico Emerging Markets Investment Trust (UEM). This invests in, as the name suggests, emerging markets infrastructure businesses and their shares. It’s an income friendly play – yielding around 3.7 per cent – with good asset backed qualities. It should have held up well in the storm, but it hasn’t. But I’ve not lost faith either in emerging markets or infrastructure assets in this space and I’ll almost certainly buy some of the subscription shares recently issued by this investment trust. They go under the ticker UEMS and they allow investors to buy into the shares at 183p right through to 28 February 2018. This is a leveraged way of speculating on a rebound in emerging markets and although I received some sub shares for free as part of the recent issue (1 sub share for 5 ordinary share) I’ll probably top up my holding by buying some more.

Tech business Allied Minds (ALM) – a US focused spin out VC firm – has also tumbled in price, although I am glad to say that I sold out a big slug of shares before the recent panic. This highly regarded firm – backed by no lesser a City star than Neil Woodford – has become the subject of a US bear raider who reckons it’s all a big investment sham. I agree that the shares did get ahead of themselves in terms of pricing (which is why I took profits) but I think this is a quality hi-tech VC play. Valuing these kinds of businesses is always a complete nightmare and in a sense you have to have a bit of faith (which I continue to possess) although I also think the shares might go much lower in the short term.

In terms of corporate activity I decided to sell my holding in Neil Woodford’s Patient Capital investment trust at 115p. This move isn’t because I have decided that Mr Woodford is wrong for backing businesses like Allied Minds (quite the contrary in fact), more because I think a 12 per cent premium to net asset value for a young fund is jolly expensive. I’ll look at buying back in when the share price is closer to book value.

I’ve also acquired a big position in a new fund called the GLI Alternative Finance (GIAF) fund. Now for full disclosure I must say that I am a non-executive director on this fund (and strongly believe you should put your money where your mouth is when sitting on a board) and I am a big bull for all things alternative finance based. But having said that I also think that investor’s will continue to sensibly price income orientated structures that mix decent asset backing with a yield of more than 7 per cent. This fund invests in a range of loans provided by alternative finance platforms owned by Channel Islands based GLI Finance, some of which operate what’s called a P2P lending model (like Funding Circle), while others are more traditional in form in that they lend from their own balance sheet.

I’m also looking to invest some money in a new placing by SQN Asset Finance which is a London listed fund that invests in what are called mid-market (expensive but not as expensive as a plane) equipment leasing assets. It’s a fairly boring business model and the fund aims to pay out a yield of around 7 per cent with relatively low volatility on the underlying assets (rather like the GLI Alternative Finance fund).

3 months of misery (percentage price changes)

To 24 September 2015

My Sipp portfolio

INFRASTRUCTURE AND UTILITIES

DEVELOPED WORLD EQUITIES

EMERGING MARKETS EQUITIES

HEDGE FUNDS/DERIVATIVES

RESOURCE STOCKS

BONDS

As at April 2015