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Sipp Investor: banks have more to give after a bumper 2012

Experienced investor Rob Kyprianou explains why he's holding onto banks, still avoiding Europe and eyes a 'superhero' in the US.

 
Sipp Investor: banks have more to give after a bumper 2012

2012 has closed, the final numbers are in and I can report that it was a decent year for my SIPP. The fund grew by 12.5% after all costs and fees. My benchmark (50% UK equities, 25% Euro equities, 25% UK gilts) rose by 9.8% in the year. In the five years since I took full control of my SIPP at the beginning of 2008 (I know – a baptism of fire!) my SIPP has risen 24.6% in value while my benchmark has fallen by 2.4% in the same period.

So what worked and didn’t work in 2012?

First the Good...

  • The outstanding performers in the portfolio were the specialist financial funds. The two funds in the portfolio rose by an average of 22% as this badly traumatised sector finally staged a recovery – having entered this recovery situation too early, this is a welcome relief.
  • The long term heavy overweight exposure to emerging equities (25%) helped performance as the global and Asian regional funds rose by 14-18% during the year. The country funds were mixed with the China fund rising by 10% and the India fund by 24%.
  • The decision to allocate the full 25% gilt component of the benchmark fully to a range of high yield and emerging market bonds helped performance relative to the benchmark as the funds rose between 5-11% while the total UK gilt index rose by around 3% over the year.

Now for the Bad...

  • I have avoided Euro equities completely for much of the Euro debt crisis despite comprising 25% of my benchmark. In 2011 this proved appropriate as Euro stock indices in sterling terms fell by 17%. However these markets recovered by around 14% in sterling terms in 2012 while I (stubbornly?) maintained my heavy underweight stance.
  • My overweight exposure to US equities was a drag on performance as my US funds rose by around 3% in sterling terms on the year. A significant contributor to this lagging performance was the nearly 5% fall in the value of the dollar against sterling in the period.

And finally the Ugly...

  • The aggressive step up in monetary easing by the Federal Reserve in the late summer raised my concern over the long term inflationary consequences of the unprecedented global monetary expansion that we have witnessed in the last 4 years. As a hedge I added a position in global commodities through an ETF and a natural resource fund. These have fallen in value since purchase by an average of 5% in a period when global equity markets have risen.

How about 2013?

The New Year is a traditional time to step back and see what themes may drive or surprise markets. Here are some thoughts:

Holding onto banks

The current economic malaise in the west was prompted by a banking crisis, aggravating public finances in a number of countries. There are only two ways of relieving a heavy public debt problem – deflate the value of debt by stimulating inflation, or stimulate  private sector growth to raise tax receipts and reduce non-discretionary public spending.

Monetary policy in the west has been the main tool for stimulating inflation/ growth but it has not worked as the banks have been too crippled to play their normal transmission role. For inflation/ growth to respond to monetary stimulus, the banks must heal first.

There are encouraging signs. In those countries that responded first and fast to the banking crisis, namely the US and the UK, there are early signs that lending conditions are easing albeit four years after action was taken. Regulators too recognise that banks need help to heal so are relaxing rules on liquidity and capital, and some governments are providing support for certain types of lending as in the UK’s finance for lending initiative. Bank recovery will lead a general recovery in the developed west– I am holding on to my financials funds despite their strong performance in 2012.

European fragmentation

A year ago I expressed the opinion that the 50 year post war trend of greater European economic and political integration was coming to an end. I believe we have now entered an era of political fragmentation in Europe where local interests come first before the interests of an ever closer Europe. There are key elections this year in Germany and Italy – representatives of the core and the periphery – where the state of public opinion will be tested.

Fragmentation cannot fail to complicate the European machinations to heal the structural fault lines that underlie the Euro and the European debt crisis. Draghi’s spectacular OMT gesture has only bought European politicians time and It is premature to call an end to the euro crisis until politicians can demonstrate that they have found a way to address the euro debt crisis and grow their economies at the same time. To do so requires someone writing a cheque and there are unlikely to be volunteers in the rising mood of ‘local for local’ that is pervading European popular thinking. I do not feel inclined to reduce my Euro equity underweight just yet.

The end of one superhero...

Equities and high yield bonds have had a good 15 months, disconnected from the real economies as Europe fell into recession, Chinese growth concerns grew, UK growth barely flat lined and the US fiscal cliff loomed. Bonds and equities have been sustained by monetary policy support – the most massive expansion of central bank balance sheets in the developed world on record by far.

But will central bankers continue to feel comfortable with pump priming capital values?

We are likely to hear more concerns coming out of central banks about the wisdom of inflating their balance sheets further – already these noises are being voiced in the Federal Reserve System. It may be hard to comprehend today, but during the course of the year expect to hear more and more talk of the end of the quantitative easing era.

The most vulnerable market to a removal of the monetary prop is government bonds in the developed world – I am a very long way from re-entering the UK gilt market that makes up 25% of my benchmark.

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16 comments so far. Why not have your say?

Income Investor

Jan 14, 2013 at 09:56

Well done Sipp Investor, and a good run through some of the mega-trends likely to impact investors.

For an overview of the success of other investment strategies you may be interested in this::http://www.the-diy-income-investor.com/2013/01/2012-year-of-high-yield.html

Glad you are thinking of ETFs (much lower charges than the funds). I am too - and I'm even going abroad for a change...

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SilverFox7

Jan 14, 2013 at 15:25

Sipp Investor.

You seem to have got most of this right. I agree with you on the Republicans. A large part of this expenditure will be to pay for people so a big cut in spending will have a very big impact on jobs. Also Iran has not gone away!

The one area I disagree is Europe. You only have to look at the European ITs Jupiter European Opportunities and European Assets to see that you can make it against the economic headwind if you try. You seem to have have missed this one having got it right in the USA. There you have separated 'Economy from Corporate' with some success.

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Bestmate

Jan 14, 2013 at 18:27

Contrarian positions on Europe and China have paid off very well for me. Indeed being contrary to the generally held position last year of "stay clear of equities" has served me well across the board. If anything I was too conservative and still hold too high a cash position but in these uncertain times I would rather miss out on some growth but sleep better at night!

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joe stalin

Jan 14, 2013 at 18:39

Dream on European fragmentation will not happen there is no exit strategy written into the constitution.

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John Thorley

Jan 14, 2013 at 20:50

Can't see how Europe can stay together in it's current form myself. Surely the southern countries will eventually come to a point where their people will take no more and their governments will have to abandon the austerity forced upon them.

The ramifications from any breakup that would ensue would be more damaging than the actual breakup itself. Market sentiment will be far more forgiving, though, if it is felt that it is more expected and planned for by European leaders than merely being broken apart by ruthless market forces in reaction to the break down of agreement. So, predicted or not, it is essential that the leaders of Europe have a breakup plan just incase people like me are right!

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joe stalin

Jan 15, 2013 at 09:33

While I am not suggesting all is well in the Eurozone much of the tension we saw over the last couple of years leading to endless speculation by the media and numerous talking heads over Grexit was the result of a handful of bondmarket parasites also know as the bond vigilantes which saw a way of making akilling out shorting peripheral eurozone debt against the core such as german paper. The cockroaches were sent scurrying back under the cupboard by a double dose insectacide from Maro Draghi first LTRM and then the real killer OMT. OMT is so feared by them that the mere threat is enough. The Issues in europe will prevail and some of them may never be resolved fully as the buraucrats are more interested in ensuring their own cosy lifestyle is preserved. A gradual recovery in economic trends globally coupled with lower interest rates should see tensions continue to ease as reforms imposed on the periphery begin to bite.

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William Phillips

Jan 15, 2013 at 17:07

"Dream on European fragmentation will not happen there is no exit strategy written into the constitution"

You sound like the optimists who denied the possibility of a general European war c. 1900 because all the crowned heads were related to Queen Victoria. Or the bulls who refused to believe there could be another market crash like 1929 because 'the authorities will take it in hand, there's too much at stake.'

The EUSSR is a collection of kleptocrats, wastrel bureaucrats and deracinated power maniacs with no armed forces behind them. All their gobbledygook treaties won't stop the 'project' falling to bits if it flies in the face of the popular will, centuries-old national and racial realities and the economic advantage of its members.

Which it does, and always has done. The UK's exit will set in motion the final process of dissolution and the freeing of 300,000,000 Eurohelots.They won't endure torture indefinitely because it says in a 'constitution' that they are trapped for life.

Better off out! Sooner, not later!

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joe stalin

Jan 15, 2013 at 17:48

I am no optimist nor a Europhile I just aim to continue making money. In waiting for Europe to disappear up its own backside i would have missed out on the rally that has been in place since March 2009. Clearly many have and many will continue to do so - so be it. As i said before there is too much vested interest to let it fail too many benefitting from prolonging the experiment for its own ends. But fragment no i dont think so nor do I think that our esteemed leadership has the wherewithall to turn it s back on the Continent. Instead we will be building lost more housing so that we can give the next lot a comfy place to live. That is the new Europe.

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Fund of Funds

Jan 19, 2013 at 13:45

Income Investor

What is the use of giving us a link to a site where most of the information is nearly 2 years old. Unless a site is kept updated with current information and yields then best to ignore it, confusing and dangerous.

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Income Investor

Jan 19, 2013 at 14:02

Fund of Funds - ??? The link is up-to-date: covers 2012.

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snoekie

Jan 19, 2013 at 17:49

Well done Rob.

For me my fund is UK based, about 60% up on last year, but I am still losing, mainly because of Lloyds, Aviva, Nat Exp and Punch. All (but for one- a punt) the other shares have grown, reducing deficit caused by the above.

Aviva is going to continue to waiver but still be a loser as a holding, even for some time to come, Nat Exp may rise but no where near to the acquisition price, but only slightly and Lloyds will rise, but not through my break even point, perhaps that will follow in 14/15. However, I expect to see the fund to reach break even by mid 13 and by end of 13 divi income up, circa 15%.

All that depends very much on the second stage of the fiscal cliff, which is, in my view, going to be a botch job.

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Fund of Funds

Jan 19, 2013 at 18:31

Income investor

Sorry I was meaning most of the other info on the sitewas very old. eg Portfolio interest rates.

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John Thorley

Jan 20, 2013 at 11:16

Joe Stalin, i did exactly what you described, i completely missed the rally from March 09 because of fear about the Eurozone but i think changing my plan now, with the markets high especially the FTSE, would be a big mistake. i may have missed the boat but there's no point jumping off the quayside!

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judy garland

Jan 20, 2013 at 12:07

Well written, thought provoking + constructive as usual- thanks Rob

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joe stalin

Jan 21, 2013 at 09:09

John With respect I disagree. Far from the boat having left it is still at tyhe quayside. The FTSE is not an accurate indicator of how the market is prized. The index has become distorted by bloated mining stocks wich have benefitted from the commodities/currnency pair trades and a following wind in the emerging countries. Some stocks have done well but they have tended to be defensives. A more benign environment shoudl see a shift out of the defensives into growth and financials. Sure the talking heads will keep trying to keep the wall of worry supplied with bricks but they and the bond shorters are running out of bad news as we are seeingThere falling bond rates in the core and yields in the periphery ie spreads are narrowing which will only see equities more closely examined for returns.There are some great yield stocks out there and some growth recovery plays as well. Banks will continue to occupy column inches and politically motivated niggling but reality is even dawning on the dumb political leadership of this country that we need a financial sector and that the slow recovery we have seen to date is a direct consequence of naive and vindictive meddling. 2013 will be no differnet to 2012 in that "crises" will continue to come up from time to time but as has been the case will peter out as the media bandwagon jumps on something else.I still like the banks, the builders the insurers and some smaller oild and biotechs.

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Clovis Bassington

Jan 21, 2013 at 11:29

I agree with the closing statements about the US. I am overweight here too and looking for opportunities. My smaller cap funds are already doing well, tracker showing an uplift but individual stock picking has been patchy. I am uncertain whether to dump Apple and Microsoft - crystalise losses and invest in heavily tipped mid-caps or whether to hang on here. I don't see a rapid rebound in US property, even if it has hit bottom, surely there's still too much overhang.

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