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Sipp Investor: why I'm holding onto cash

Challenged by his wife, Rob Kyprianou considers why he is hanging onto the cash holding that has held back his portfolio's performance.

 
Sipp Investor: why I'm holding onto cash

My Sipp (self invested personal pension) portfolio rose by 1.3% in the month of November. A nice return for one month given the economic backdrop and the fiscal cliff gridlock in the US following the election there.

However, my portfolio’s upbeat response to these headwinds could not match that of markets generally as demonstrated by my benchmark (50% UK equities, 25% Eurozone equities, 25% UK gilts) which rose by 2.0% in the month.

For the year my portfolio has returned 11.9% compared to 8.7% for my benchmark. Again my cash holdings and my large underweight in Eurozone equities were responsible for lagging the benchmark despite the decent performance of my emerging equity and high yield and emerging debt holdings.

 

Buying into US & China

Last month I wrote that, following the US election, I was in a wait-and-see mood and would, in the meantime, only act if some market move created an opportunity. In the absence of a substantial market correction or exuberant rally to exploit, I topped up in a couple of markets which I already owned but which were exhibiting some market weakness. The fact that this weakness was in the equity markets of the world’s two largest economies was in itself a reason not to get too carried away.

I added to my holdings of the Threadneedle American and the First State Greater China Growth funds. These purchases took my US equity exposure to 13.6% and my emerging market equity exposure to 25%, reducing my cash to 9.4%.

What's holding me back?

But, given the decent performance of most capital markets and the leakage in my performance versus my benchmark in the past few months, what is holding me back from putting the rest of my cash to work? Challenged by my wife’s reproach on this question, namely that all men suffer from commitment problems, I felt I had to be clear in my own mind as to what was holding me back.

In the popular jargon of today, for my portfolio to be fully ‘risk-on’ would require the US fiscal cliff to be resolved, confidence that China’s growth slowdown will be short-lived, the Eurozone to embark on a growth-inducing crisis resolution programme, and  for the UK economy to be able to break out of its growth malaise. Of course there are other factors that could impact sentiment, including events in the Middle East, but right now these are the considerations uppermost in my mind.

My own score card on these drivers is somewhat mixed. The discussions by policy makers on the US fiscal cliff have not appeared to have gone well. As I write it is not clear to me what type of deal – if any – will be in place by the end of the year. Anything from going over the cliff to extending the deadline well into next year seems an option. Even if a deal is put in place, the outcomes are so wide open that the impact on the economy in 2013 and beyond is difficult to predict in advance. The reasons for this policy gridlock were described in my article last month – the political and ideological divide is not so great that talks can be described as intractable, but they highly complicate negotiations. At least we will know something by the end of the month, good or bad.

In China the more recent signs are encouraging. The new political rulers have spoken about the need to support growth, to encourage the restructuring of the economy away from its dependence on investment and export led growth to consumer expenditure, and to crackdown on corruption. At the same time data on factory output, retails sales and inflation have been better, although export growth is finding it hard given global conditions. Sentiment towards Chinese growth and equities has room to recover.

UK is best house in a bad neighbourhood

If any problem seems intractable it remains the Eurozone crisis. A Greek budget deal and some progress on a Eurozone banking union, albeit at a very early stage, have propped up sentiment.

However, although there are indications that policymakers are becoming more sensitive to the possibility that pure austerity as a solution to the crisis has passed its sell-by date, there is still no credible sign that Eurozone politicians know how to deal with the financial and debt crises and grow their economies at the same time.

As a result, the zone drifts into recession with contagion reaching deeper into the core of the Euro countries. Instead of a united political front, politicians and public opinion continues to drift towards greater political fragmentation. Italian prime minister Mario Monti’s threat to seek early elections in Italy in which he will stand will only serve to bring these fragmenting forces to the forefront in one of the key eurozone indebted countries.

As for the UK, its prospects seem to be set. The chancellor’s Autumn Statement made 3 things clear: there is no Plan B  to mitigate the path of fiscal rectitude that the government has embarked on; as yet there is no change to the fiscal policy mix of being tough on macro fiscal levers such as state spending while trying to encourage growth through supply side measures such as corporate tax rates, investment allowances and funding for lending; and the government’s chosen path has no credible alternative to contend with.

This fiscal backdrop, plus the position of the UK as the best house in a bad (European) neighbourhood, will keep the medium term growth environment in the anaemic to modest range.

Clarity to invest

Thanks to my wife I have at least cleared my thoughts to the point that I have clarity in what I am looking out for when deciding my next investment policy moves. Feeling better I can now focus on Christmas. Next month I will review my portfolio’s performance in 2012, warts and all, and will look forward to 2013. In the meantime I wish you all happy holidays and a prosperous end to what has been an exhilarating and, it would seem with only a few days to go, rewarding 2012.

46 comments so far. Why not have your say?

an elder one

Dec 12, 2012 at 10:17

looks pretty obscure to me!

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Geoff Downs

Dec 12, 2012 at 10:35

The markets are driven by fear and greed and of course Mr Bernanke.

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Anthony O' Grady

Dec 12, 2012 at 10:36

Rob

There are voices out there expressing grave concern about the bubble which has developed in UK gilts and US treasuries, and that bond prices are about to collapse. Any thoughts on this?

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Geoff Downs

Dec 12, 2012 at 11:00

My name isn't Rob, but there is no bubble in Gilts or Treasuries.

The yields on Gilts are indicating deflation.

As this world economic crisis unfolds more investors will turn to these asset classes.

Sorry I will let the expert give his opinion.

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Anthony O' Grady

Dec 12, 2012 at 11:30

That's okay Geoff, opinions always welcome. You appear to be in the Steve Keen/Bob Prechter camp rather than the Peter Schiff/Marc Faber fraternity.

Only time will tell.

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Anthony O' Grady

Dec 12, 2012 at 11:33

PS- although Prechter says hold cash only, and in a secure place (not a bank) because he believes that eventually the US Govt will default absolutely. Schiff believes that the Govt will default via the printing press and the creation of inflation.

?

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Jollyboys

Dec 12, 2012 at 13:43

I have got over 10 years till retirement so my foot is hard to the metal and I am 100% in stocks. 10% Aberdeen property shares, 10% Blackrock Global Property reits index tracker, 10% Blackrock North America index tracker, 10% Blackrock pacific ex Japan index tracker, 10% First state global emerging markets leaders, 20% M & G global dividend, 10% Standard life European equity income and 20% Vanguard UK equity income index tracker.

Bought the property funds when they were aprox 40% down on 2008 prices.

Doing ok this year so far but only time will tell

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Geoff Downs

Dec 12, 2012 at 13:49

Maybe you should consider retiring in 30 years.

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Tony Peterson

Dec 12, 2012 at 18:32

The real value of UK cash is depreciating, at personal rates between 2% and 10% depending upon what you use it for. My inflation rate (as a pensioner) is around 9%.

UK companies are, for the most part awash with cash that they hardly know what to do with. Most FTSE 100 companies are increasing their dividends at rates higher than inflation. Every spare grand that dividends deliver to my wife and self gets quickly placed in our "shares of the week".

The miners in our portfolio are up over 20% in three months. Banks likewise.

FTSE is still down on ten years in spite of inflation. There has scarcely (since 1975 at least) been a better time to invest in equities.

The idea of sticking to cash seems to me as irrational as belief in the tooth fairy.

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Geoff Downs

Dec 12, 2012 at 18:40

" the idea of sticking to cash seems to me as irrational as belief in the tooth fairy"

What seems irrational to me is anyone believing these markets are safe.

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Tony Peterson

Dec 12, 2012 at 19:05

Geoff

What exactly do you mean by "safe".

As safe as the value of cash? ( Which is certain to depreciate.)

Markets by their nature are volatile. When shares go down they often provide great buying opportunities. When they go up they provide great selling opportunities.

No. Stick to your cash, Geoff. If I had stuck to mine instead of dipping toes into various income generating asset classes, I'd be more than 90% down on our present portfolio valuations.

Would that not have been irrational?

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Old Skool

Dec 12, 2012 at 19:16

I have a few thoughts on the above

1. The US and the UK will NOT hard default on their USD and GBP (respectively) obligations. They don't need to, they can print money to an infinite degree. The enemy is therefore INFLATION longer term.

2. Deflation would be even worse for the indebted Govt than anything else as the size of thier liabities grows in time rather than shrinks - so they will do anything, repeat anything to generate inflation.

3. As a main defense against this we have Inflation Linked Bonds (expensive at current inflation rates, but not when inflation kicks off), Gold (again expensive at current inflation rates) and to some extent defensive equities (somewhat expensive with PEs above 15).

4. Any growth will need to come from market with lower debt or lowering costs - in the USA lower energy prices from shale gas may be a game changer - Asia and EM markets such as Brazil and India

5. The Fisical cliff problem will be resolved - but it will be a compromise which means somewhat lower Govt spending and higher taxes - either way the compromise will slow growth a bit, but will not bring the USA back to recession. The makets will be both releived and disappointed at the same time - the net effect wil be a small equity market drop I think - no more than 5%.

6. These low rates and poor growth in the West are with us for the foreseeable future 3 - 5 years.

7. The market will be volatile on poitcal nose.

8. Use the drips to incresse holding in incom generating assest (equity income, high-yield bonds) and reduce holding in cash and Govt fixed income (NOT Index Linked) bonds.

9. Key markets will be the USA of course - but also Europe which will surpise and maybe (just maybe) Japan. EM will do ok, but not spectacularly.

10. Suggest asset allocation (medium risk) 40% Developed Equity, 10% EM equity, 30% IL Bonds, 10% High Yield, 5% Gold and 5% Cash (for the dips)

Happy to hear ahy thoughts or comments.

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Geoff Downs

Dec 12, 2012 at 19:22

Firstly, I don't think I have confirmed on here where I am invested.

Secondly, I do not believe we are going to get inflation.

Thirdly, I do believe we are going to get deflation.

Fourth, I think many of the investments in the stock market are not risky, they are pure dangerous, as we saw when some banks when belly up.

Fifth, the markets are rising on money printing and not fundamentals.

Sixth, many countries economies are unstable due to debt.

Seventh ,QE is evidence that world bankers and politicians are desperate.

Eighth, banks aren't lending and consumers are broke.

Ninth, the markets are waiting for the suckers to come in.

Tenth, I am looking forward to Christmas.

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Anthony O' Grady

Dec 12, 2012 at 19:51

The comments about the dangers of inflation are appreciated. However Prechter's argument is this. The Fed has already printed an enormous amount of money but where is the hyper inflation? The money is disappearing into the banks coffers, but they don't want to lend it and nobody wants to borrow it. Look for the debate between Prechter and Peter Schiff on You Tube. Interesting. Schiiff's view is that the Fed simply hasn't printed enough yet.

As for the comment that there has never been a better time to invest in equities, I don't agree. The optimum time as history has proved, is when pe ratios drop to low single digits and yields go into double figures. As Russell Napier has said, if you had piled into equities in August 1982, you could have strolled off to the beach for 18 years and become very rich sitting on your backside. Current markets are NOT in August 1982 territory, and are being manipulated (now not very successfully) by desperate Governments who print money and keep interest rates at rock bottom because they don't know what else to do.

You can trade in and out and make money (if you're lucky) but to state that there has never been a better time to invest in equities ignores the lessons of history.

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Tony Peterson

Dec 12, 2012 at 19:55

As I thought we might when I mentioned the tooth fairy, we are getting plenty of irrational beliefs.

"I do not believe that we are going to get inflation"

We have had nothing but inflation for 78 years on the trot. What will return us to 1920 now??

"I do believe that we are going to get deflation."

On what evidence one might ask?

Tomorrow I am taking some excellent profits and reinvesting in bargains, as I have done very profitably for 37 years. Stick to your beliefs, Geoff. This may be the time something different happens. But I think that Old Skool has a much better grasp of reality than you. Time will tell who is right.

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Geoff Downs

Dec 12, 2012 at 20:22

Andrew,

I would go along with that view,and you explain it better than me.

Tony,

I do not dispute your track record.

I take it you would accept there as to be losers in the investment game. Clearly for everyone to be winners would be impossible. For that to be true shares would have to rise for ever.

Both the State and the consumer will be paying debt back for a number of years.

Bank lending and consumer borrowing will fall back and I cannot see inflation under those circumstances.

I think Anthony's comments about the best time to invest are spot on.

The market always needs new money to pay the original investors. Of course the real danger comes when the majority of investors sell at the same time.

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Geoff Downs

Dec 12, 2012 at 20:28

Sorry, that should read Anthony.

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Tony Peterson

Dec 13, 2012 at 07:51

Geoff

You make several bold assertions about future events which I believe are unfounded, and, most probably, wrong.

Past events can be known with certainty. Future ones cannot. Money has lost value for every one of my 75 years. You tell me next year it will go up. Over 99% of the value of the pound has evaporated over my lifetime. If a coin comes down heads 75 times in a row I would think it most probable that there is something not exactly "fair" with the coin, and would bet on it coming down heads again. You tell me it will be tails next year. Well, you might be right, ....but.

You are also wrong in apparently assuming that the stock market is a zero sum game. Historically, shares in the ownership of companies which produce goods and services which people are glad to consume create real wealth and generate profits which are shared amongst their owners. Stockmarket investment historically has proved a positive-sum game; holding cash has decisively proved a negative sum game.

You gratuitously assert that bank lending and consumer borrowing will fall back. What is gratuitously asserted can be gratuitously denied. I do just that. I think you are wrong. Only time will tell for sure.

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Old Skool

Dec 13, 2012 at 09:09

One thought I have about why QE and other money printing is not currently leading to inflation:

The main beneficiaries are the banks. They can borrow using repo from the central bank and then buy longer dated Govt bonds for a positive yield pick up for very little risk. They are using this to rebuild their balance sheets which have lost money from bad debt etc. I think once this process is complete the excess funds will leak out into the general economy and provoke more inflation. In a sense the current money printing is replacing assets lost in the banking crisis by the banks. The problem i foresee is this is very experimental and difficult to control and the central banks would rather overshoot than undershoot the process.

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Geoff Downs

Dec 13, 2012 at 09:29

Tony,

I have not made any reference to the value of the pound.

Regarding bank lending and consumer borrowing falling, the evidence is already there.

Ask yourself why the Fed is pumping trillions of dollars into MBS and treasuries?

Are you saying we are living in normal economic times?

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Old Skool

Dec 13, 2012 at 11:32

One final thought:

I too dont think that equities in general are "very cheap" - measures like PE and PE10 would indicate that they are around fair value to slighly dear. One distortion is the artificailly low long term discount rate brought about by QE. Higher rates mean lower present values of dividends etc and therefore lower equity prices.

However having said that - I think large global blue chip equities represent one of the "least worse" place to put your money right now. Any upturn in rates will be because of an increase in growth and reduction in unemployment which should be good for equities and offset the higher discount rates. Higher rates will of course be bad for fixed income bonds.

As has been said above - only time will tell who is right and it takes many differing opinions to make a market. Its good to debate!

Merry Christmas and a Properous New Year!

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Anonymous 1 needed this 'off the record'

Dec 13, 2012 at 12:16

If you want to focus on P/E the cyclically adjusted pe ratio over 10 years developed by Robert Schiller is the one to watch. By this measure the US market is probably about 40per cent overvalued. Marc Faber reckons that the final bottom for the S&P wil be circa 660. Apologies for quoting the same names, but these guys are part of a tiny, and much maligned minority, who despite being ridiculed were warning back in 02/03/04 that things were going to turn ugly.

With regard to equities I don't believe that the cult of equity investing is dead. It's just that we are in the midst of a monster bear market which began in 1999 and which, I believe, still has 4/5 years to run. This is my belief. Who knows, i might be wrong. So forget fair value, because in a final descent to the bottom share values can be dragged way below fair value. Remember, the theory that the markets are efficient is fatally flawed.

So, would I invest in equities again? Not right now. When then? When markets are 20 per cent lower than they are now.

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Anthony O' Grady

Dec 13, 2012 at 12:17

If you want to focus on P/E the cyclically adjusted pe ratio over 10 years developed by Robert Schiller is the one to watch. By this measure the US market is probably about 40per cent overvalued. Marc Faber reckons that the final bottom for the S&P wil be circa 660. Apologies for quoting the same names, but these guys are part of a tiny, and much maligned minority, who despite being ridiculed were warning back in 02/03/04 that things were going to turn ugly.

With regard to equities I don't believe that the cult of equity investing is dead. It's just that we are in the midst of a monster bear market which began in 1999 and which, I believe, still has 4/5 years to run. This is my belief. Who knows, i might be wrong. So forget fair value, because in a final descent to the bottom share values can be dragged way below fair value. Remember, the theory that the markets are efficient is fatally flawed.

So, would I invest in equities again? Not right now. When then? When markets are 20 per cent lower than they are now.

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Kenpen2

Dec 13, 2012 at 12:31

10 mins on t'internet reveals the following :

UK RPI inflation since 1/1/2000 has been about 40%, i.e. value of money has declined by 29% in real terms ?

FTSE 100 is today about 1000 points off its 31/12/1999 high of 6930, i.e. a decline of over 14% in money terms.

Adding these together, the FTSE would seem to have declined in real terms by about 43% over the past 13 years.

Meanwhile UK population has increased from around 58.8 million to an estimated 62.3m, or nearly 6% (- be afraid !)

World population has increased from 6.06 billion to nearly 7 billion, or >15% (- be very afraid !!).

These "facts", though approximate, incline me to agree with Tony that equities in general are a strong buy for the medium to long term.

Anthony, the market may not be as strong a buy as it was in 1982 and there is always room for further downside in the short run. But we don't know for certain that those same depths will be plumbed and there are now some grounds for cautious optimism ?

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Kenpen2

Dec 13, 2012 at 12:49

PS Rob, I looked up your Threadneedle American fund and Citywire says the min initial investment is £200K ! Could you suggest something more affordable for us little guys ??

PPS What's the attraction of this particular fund anyway, given its mediocre ranking of 29/102 in its sector and that it lagsits benchmark over the past three years ?

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Anthony O' Grady

Dec 13, 2012 at 13:49

Kenpen 2

Watch the number of earnings disappointments in 2013 - not yet priced in

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Tony Peterson

Dec 13, 2012 at 17:49

Well, here's one for those of you who are scared of equities. As I promised last night we did a bit of profit taking and reinvestment today. The background to this is that when my wife made her full S&S ISA contribution at the end of June, and noting that we had taken profits from Sainsbury when it was 390p a year or so back thought that it seemed a bargain at around 290p, we bought back what we had previously sold as a considerable portion of her ISA. Two months later we sold for over 333p, and switched the proceeds into Rio Tinto at 2733p. We sold these this morning at 3319p. Making a tax free gain from the two deals of 35% in less than six months. The proceeds have been reinvested in Vodafone - currently unpopular, at 162p. These will be sold should Vodafone go over 220p in the near future. If it happens before June it will be an 85% gain on the year. What is your cash getting chaps???

Because we have employed a strategy along these lines since 1975, our equity portfolio alone is today worth far more than all the money we earned in our working lives. Of course (its the point I've been making) this is not so spectacular if inflation is factored in. I haven't done the sums but I suspect that we would still hold more than we ever earned even in real terms.

Falling stock markets create buying opportunities. Rising stock markets create selling opportunities. Note well all you nervous nellies with your specious reasons for staying in cash. None of us know what will happen in the future, but my bet is that our income will continue to rise.

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sgjhaghsdg

Dec 15, 2012 at 11:08

@Kenpen2 - You're ignoring dividends.

Here is the FTSE versus the FTSE Total Return on a few dates.

Dec20 1999, FTSE 100=6930, FTSE 100 TR=3141

Jan30 2006, FTSE 100=5780, FTSE 100 TR=3141

Aug17 2012, FTSE 100=5852, FTSE 100 TR=4077

So, the total return was back to the same level by 2006 and is now well above this despite the credit crunch. Markets are up well since August but I can't be bothered finding more uo-to-date numbers!

Of course, in real terms we're only just up, but why are we worrying about performance from a freak peak? Did anyone really invest everything on just one date at the top of the market?

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Kenpen2

Dec 15, 2012 at 12:14

My point was that in real terms, FTSE 100 stocks are now almost half the price they were at that freak peak 13 years ago and thus an obviously better buy, lots of room for upside even without factoring in dividends. Taking TR into account reinforces the point.

Of course there remains the possibility that the FTSE could follow the Nikkei and sag further over the next 13 years. But dividends and judicious stock-picking (would that we all had Tony's timing!) help mitigate this risk.

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sgjhaghsdg

Dec 15, 2012 at 16:16

Ah, OK, fair enough.

I hate the old "lost decade" argument and tend to go off on one rather easily!

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Robert Kyprianou

Dec 16, 2012 at 10:14

Apologies for delay in responding to specific questions - I have just returned from a trip to Athens to catch up on views/ events there ( a strange mix of resignation and despair - perhaps for another article).

Anthony O'Grady - you ask whether Gilts/Treasuries are a bubble. Normally bubbles are described as prices being driven to inflated levels by large speculative buying for reasons other than to do with value/ fundamentals. For Treasuries/gilts to offer value at their current levels requires a belief in negative growth and/ or deflation for 10 years or more. There are those who hold this view, some are represented in the comments to this article. I do not buy into this view over the long term - I have written before that I do not believe that the rest of world is Japan. But there is another factor too - yields are being kept this low also by the presence of a (VERY) large buyer in the market who is driven by factors other than value, namely the Fed and the BOE. QE has poured enourmous amounts of central bank money into the gilt and Treasury markets. Even before the Fed announced QE4 last week with its regular monthly purchases of Treasuries, it already owned 15% of the market! Whether you call this speculative or a bubble, for me the yields in Treasuries and gilts are at an artificially low level that do not offer vlaue. Although gilts are 25% of my benchmark I sold my last holding a year ago and these were indexed linked which I sold out of once the implied real yields fell to zero and below making them very expensive unless you bought into the depression scenario long term. I own corporate and emerging market bonds. One day there will be a sharp and severe correction in gilt/ treasury yields, although this may be sometime off.

Kenpen 2 - you ask about the Threadneedle Americam fund. I own the Retail Accumulation version through my SIPP provider, Hargeaves. The SIPP platform sets the limit on my purcahses at I believe £1000. Trustnet says the minimum initial investment is £2,000. The latest factsheet for the fund (30th November) says that the fund has been first quartile over 3, 5 and 10 years. In the last 5 years it has beaten its benchmark every year except the last year, where it has had a performance dip. I own 3 funds in this sector (AXA Framlington American Growth, Henderson US Growth) and topped up on this one because it had the lowest weight of the 3 and (hoping) for a performance recovery. One word of caution - I like funds not only with consistenet long term excess performance but also with longevity of manager. Although Cormac Weldon, the Head of US equities, has been at Threadneedle for 15 years, they did lose one of the team (Andrew Holliman) early in 2011 who had been working on the fund since 2004.

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Anthony O' Grady

Dec 17, 2012 at 13:39

Thanks Rob

The follow on is of course that if gilt yields rise sharply interest rates will follow, and the collapse in the housing market which the UK Govt has been desperate to avert, will follow.

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Robert Kyprianou

Dec 17, 2012 at 16:27

Anthony

I am not so sure that disaster will follow a rise in interest rates. The circumstances in which they rise may be positive for real assets (e.g. an economic recovery/ strong rise in asset prices). They are unlikely to rise in circumstances in which the economic recovery is fragile, after all that is why we have the QE programmes. In some respects I am hoping that rates will rise to more normal levels as it should indicate that we have returned to more normal economic and financial market condtions in which real assets and economic activity can thrive once again.

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Kenpen2

Dec 17, 2012 at 17:11

Rob, thanks for your thoughts on specific funds. Citywire's own factsheets are still showing £200K min initial investment for Threadneedle and £100K for AXA, your figures sound more plausible, maybe Citywire could look into the glitch ? They wouldn't want to get a reputation for inaccuracy ...

I want some exposure to the US (having none at present) but the only funds which have significantly outperformed their benchmarks seem to be not surprisingly those which have majored on Apple, IMO an accident now waiting to happen. Maybe I'd be better off with a tracker ...

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Robert Kyprianou

Dec 17, 2012 at 17:41

Kenpen2

Thanks for pointing out the Citywire 'glitches' - I will pass it on. The US sector has been a tough one in which to find consistent outperforming UK onshore funds/ managers. A tracker is certainly a good way of participating rather than miss out on an idea while searching for a decent actively managed fund.

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Frank Talbot (Citywire Research)

Dec 18, 2012 at 10:47

Kenpen 2

Thanks for bringing this to our attention.

In this case the minimum investment level displayed on Citywire’s factsheets refers to the institutional share class. It is a quirk of the fact that we choose the fund share class that has the longest track record.

The reality is, as Robert states, you can access these funds at a more affordable level both directly or through a platform.

Thanks,

Frank

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John Osborne

Dec 18, 2012 at 11:43

Jollyboys,

I do not know who advised you but I think with that portfolio retirement might be a lot further away than you hope..

There are some excellent funds and trusts out there but you seem to have avoided most of them whilst still keeping the risk of 100% equities.

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Tony Peterson

Dec 18, 2012 at 12:35

John Osborne

You wouldn't by any chance have a vested interest in the provision of funds and trusts, would you?

You know you really should declare an interest if you have.

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John Osborne

Dec 18, 2012 at 13:48

Tony, Absolutely not.

Congrats on spotting Sainsbury's and RIo Tinto were undervalued correctly and selling at the right time, an example for us all.

You are a very skilled direct investor but this is not for everyone, Rob K has a selection of OEICs and Citywire research helps a lot. Most of my savings are in investment trusts, particularly for overseas investment where researching, buying and selling individual shares is not so easy, even if one has the time and skill. I think western currencies will continue to deflate so investing in well run overseas economies with professional managers seems attractive to me.

I agree holding a lot of cash also is bad as you say because inflation looks to increase with QE and devaluation continuing, but it is opinion as to how much to keep in reserve to buy either undervalued stocks out of favour or when there is a market setback. But certainly if I was nearing retirement I would be nervous being all in stocks if I had to buy an annuity.

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Tony Peterson

Dec 18, 2012 at 14:08

John

Thank you for the congratulations, but my timing was, in fact, less than perfect - it would have been better to have held Rio until today, before switching. I was waiting for someone to point this out.

If I was nearing retirement, in this climate, I would not be in a situation where "I had to buy and annuity". This to me, is like saying "where I had to go and shoot myself". Annuities, today, are the scam of the new century. But I am retired. I am 100% in equities. I get rid of cash quickly into whichever of our holdings looks a bit down on its luck.. My pre-retirement mistakes all involved funds, pensions, pooled investments, cash. All, in my view, rubbish and dangerous rubbish at that. Equities and invested dividends have never let me down. I do not expect them to do so in future. Whatever the risible doomsters predict.

And there are sound mathematical reasons why the offtakes of middlemen are sure to damage your chances of building financial security for yourself.

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John Osborne

Dec 18, 2012 at 16:25

Tony,

Heaven forbid, I did not mean to imply it was a good thing to buy an annuity at present unless one was absolutely forced to. Gilt rates on which annuities depend are artificially held down by money printing which makes them very poor value at present.

When equities UK and overseas are yielding 4 or 5% it seems to me to be a good decision to use a spread of these for rising income, if possible within ones circumstances.

Overseas trusts can do well, I invested in Aberdeen Asian Income Trust when it floated early 2006 and despite the discount risk its capital value has doubled and income risen by a half, almost enough to buy us a modest holiday every year now.

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Tony Peterson

Dec 18, 2012 at 21:10

John

You can easily acquire a spread of FTSE 100 companies yielding 7+% (not just 4 to 5% ) with those same companies stating their intention (barring accidents of course) to continue rising their dividends ahead of inflation.

At different times in the last four decades I have invested in many different asset classes. But now, at this time, it is 100% equities. I do not think there is any other game in the stadium.

That is my reading of the economic entrails. Others are free to differ.

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sgjhaghsdg

Dec 18, 2012 at 22:12

7% is double the average FTSE 100 yield and thus requires that you concentrate on a few companies with way above average yield, which implies more risk.

Would you care to suggest a portfolio of companies with an average yield of 7%+ that has a good record of solid dividends (no cutters!) and has promise of RPI+ increments? A good sector spread would also be nice as would 15+ holdings.

You said it was easy, so please plonk down a list of companies.

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John Osborne

Dec 19, 2012 at 10:09

Tony,

Certainly Companies like RSA are on a very healthy yield but I just do not trust the general insurance sector with risk of increasing natural disasters via global warming and other reasons. The current flooding predictions are not going to help either. Maybe illogical, perhaps this view generally is why their shares are out of favour and a reason for buying them?

All other 7%+ companies may be similarly disliked for various but valid reasons (e.g. Utilities with high debt and prospect of regulatory rewiew with dividend cuts, etc..), but agree this is not necessarily a reason for not holding the ones with better prospects in a well spread portfolio.

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Tony Peterson

Dec 19, 2012 at 15:21

sgj etc:

Well your constraints would give me quite a task. I'm surprised that you didn't add "and one where the CEO comes to tuck you up every night". However, a more modest portfolio of RSA, Aviva, Vod, AZ, SSE, NG and GSK should do the trick if you weighted the buys towards the front end of my list.

John

And do you think that a company like RSA will not be costing in the global warming risks into your premium ( and helping to put inflation up) next year?

I thought that this little yield list might let some of you see where I am coming from. This is our effective yield from our own holdings in FTSE 100 companies. It measures the dividend yield as a proportion of our actual contributions ( net of dividends received and gains realised.)

SSE 26.4%

VOD 10.7%

BT 10.3%

Aviva10.25%

GSK 9.9%

Centr 8.9% NG 8.9%

AZN 8.8%

RSA 8.6%

UU 7.3%

Seven of these companies are ones in which our total interest is in six figures.

I suppose, given all your reservations, I just have to admit that I seem to be hopelessly optimistic about UK equities, especially since the world ends on Friday? Yeah, right.

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sgjhaghsdg

Dec 19, 2012 at 15:32

As it happens, my wife does hold a portfolio of 25 high yield FTSE 350 shares, but the current forward yield is 4.7%. Adding enough shares with yields high enough to average 7% would involve a *lot* of risk IMO.

Yes, she holds some Aviva and Vod, but also the like of Diageo, RB and BLT as I think you need balance.

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