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Sipp Investor: where I'm investing my spare cash

Although still concerned about the strength of the market rally, Robert Kyprianou has used some cash on new investments. 

 
Sipp Investor: where I'm investing my spare cash

When Sir Alex Ferguson joined Manchester United Football Club in 1986 he famously promised to knock Liverpool – kings of English football over the previous decade – ‘off their perch’. It took him six years to win his first league title and the rest is history.

Since the credit and banking crisis of 2007-8 the most common refrain from financial risk takers has been that ‘cash is king’. In reality that has meant cash and fixed income as the return on cash became negligible. Yet in the last 12 months we have witnessed an impressive rally in global equity markets – the FTSE All Share is up around 30% over one year, while other major developed markets have risen in sterling terms anywhere from 20% to, in Japan’s case, 65% over the same period.

Have equities, five years after the credit crisis began, finally knocked cash off its perch?

This is a particularly pertinent question for my portfolios where I have built up cash earlier this year into the rally, selling equity and corporate bond holdings. The driver for these sales was the apparent disconnect between the global equity rally and the global real economies where growth was either weak or weakening with little on the horizon to suggest any change soon.

Sound foundations?

In this background the rally in equities was being fuelled by massive central bank liquidity injections and the lack of alternatives. This can provide fuel to support purchases for a while, but is it a sound longer-erm investment foundation?

As well as liquidity and the lack of alternatives, a third factor has now joined in to support the equity rally – momentum. This driver gets into the area of behavioural finance – the difficulty in watching markets rally month after month from the sidelines can create its own self-reinforcing reality as momentum becomes the justification for participation.

To be fair, the corporate sector is the healthiest of the global economic sectors. This is especially the case in the developed West where corporate balance sheets have been repaired, where cash flows are strong and where bottom lines can continue to exceed expectations. The favourable corporate conditions are reflected in low corporate bond yields and spreads.

However, company performance cannot disregard the economic background for too long. Where there has been disappointment in corporate performance is in the top line. There is a limit to the extent that good cost control and balance sheet re-engineering can sustain growing profitability while revenue growth is challenged.

Cash, US property and commodities

It is notoriously difficult to determine how long liquidity and momentum driven equity rallies can ignore fundamentals. So far I have kept my nerve and continue to hold cash in my portfolios. Portfolio construction has helped mitigate the impact of cash on performance, specifically overweight US equities, financial equities and non-government bonds and underweight European equities and government bonds.

However, as markets continue to rally there is a limit to the ability of portfolio construction to limit the performance drag of cash. So I have put some of my cash back to work but in areas with specific stories. Earlier this year I became confident that the US housing market had finally found a bottom. I made my first step by buying real estate investment trusts (Reits). I have now added to the theme by investing in US homebuilders via the SPDR S&P Homebuilders ETF. The US equity market is a market I prefer and the housing sector looks like a good recovery sector within that.

My second purchase is more controversial and contrarian. The natural resource/ commodity sector has been a serious underperformer over the past year. I have held a small holding in this sector via an ETF and the First State Global Resources fund. If I am wrong about the outlook for the global economy, and equities are really trying to tell us something about future growth, then this beaten up sector should recover strongly. Hopefully I can avoid the risk of jumping onto the equities bandwagon by buying into market leaders – a potentially double whammy should the market run out of steam.

Despite these purchases I continue to hold 13% in cash in my portfolio as my original concerns remain.

Fund manager alarm bell

Finally, portfolio construction has not been the only factor helping me withstand the performance effects of cash. I express my asset allocation choices by buying mutual funds where I aim to identify managers who can outperform in their sector. Here I look for good, sustainable long-term excess returns. This is a tough benchmark that few managers can achieve in the UK mutual funds industry. But there are some.

So a major alarm bell sounds when one of these managers moves or retires, leaving behind the fund on which they built their record. This spring has seen a merry-go-round of manager movements, one of which has affected one of my holdings – the Jupiter Growth and Income fund . This has been managed by Philip Matthews (pictured above) since 2001 and has a good track record against its benchmark and its peers over that time. So it was with disappointment that I heard the news that Philip was leaving to run the Schroder UK Alpha Plus fund following the departure of its manager, Richard Buxton, to Old Mutual.

The manager who has taken over the Jupiter Growth and Income fund, Chris Watt, has still to achieve the standards I apply in selecting managers. Consequently I have sold all my holding and reinvested equally in my other UK equity funds.

After all, it is hard enough to make good asset allocation calls to let performance leak through poor manager or stock election.

11 comments so far. Why not have your say?

David 111

May 22, 2013 at 08:16

Isn't it a sign that the market is overheating when people who have been sitting with their cash on the sidelines decide they can no longer afford not to pile in?

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Chops

May 23, 2013 at 17:19

I like your thinking around the US housing market, but it worries me that the ETF has gone up around 50% just in the last year. I have been having the same thoughts on commodities and have been holding onto my ETF and my First State and JPM fund holdings (though probably should have sold JPM when I first learned Ian Henderson was stepping back).

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Secret CEO

May 24, 2013 at 07:21

Good point David

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Tony Peterson

May 25, 2013 at 11:54

With the benefit of hindsight, it has been a mistake to cash in equity so far this year.

With the benefit of foresight, fortunately, I didn't. I'm still 100% in equities and cheerfully reinvesting dividends in any dipping shares.

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John Osborne

May 25, 2013 at 14:07

Tony,

Agreed. Looking at the CAPEs USA is overvalued, UK fairly valued, EU undervalued. etc.. Of course if USA goes down it drags us with it, but it is a long term value game riding out short term noise.

If EU central bank prints money, then we can expect a spike in markets over the channel which could support ours. Ours continues to be supported in this way, government stupidly propping up over-valued housing market etc...

Regards Rob's choices, I disagree with investment strategy and analysis. I think Chinese and Western slowdown will continue to be negative for commodities except possibly gold and silver and USA market overvalued now.

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the scout

May 27, 2013 at 17:50

Nobody likes a smart arse Tony.

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Tony Peterson

May 28, 2013 at 16:12

I find it amusing to speculate as to what private grief could have elicited such a snide and sneering comment from the (anonymous) scout.

Missed the bus have you?

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Chops

May 29, 2013 at 16:34

Are you guys really serious?? By the looks of it you wouldn't be able to see a sellers market if it bit you in the proverbial, and I predict Mr 100% Equities Tony is going to have a very sore backside pretty soon.

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Tony Peterson

May 29, 2013 at 17:57

Chops

As I have said previously, I am happy to re-invest dividends in dips. If there were no dips I would have nowhere to reinvest.

Today's falls are very welcome. I do not understand the connection some of you seem to want to make between my bank balance and my posterior, but that is your problem.

The dips I am currently watching are those in the SSE price, and RT, in both of which I aim to increase my stake.

With serious divs in from insurers this month, and Barclays and Centrica in the next week or so, I hope that prices continue to tumble, though I think it not terribly likely..

If not, though, there will be other opportunities. There always are.

If equities halved I would still be in serious profit. You doomsters don't really get it. Fortunately for me.

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Chops

May 30, 2013 at 16:31

The problem with dips is that by definition they don't take shape until after they've happened...

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Tony Peterson

Jun 04, 2013 at 12:55

Hey, chump Chops. You have your crystal ball on the wrong setting.

You confidently predict that I will have a sore backside shortly, yet you can't spot a dip until it happens.

You'll be pleased to know I've snapped up a few bargains yesterday and they are performing well today.

I predict that it will be bond holders and bond holding funds which will have sore bums soon. Haircuts and lost capital. Not equity holders. Wait and see.

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