The first quarter of 2013 was by any measure a bumper quarter for equity markets. But was it a good quarter for my Sipp portfolio?
At first sight, the omens are not good. The benchmark that I use comprises 50% UK equities, 25% euro equities and 25% UK gilts.
This benchmark reflects that I am a UK-based investor looking to draw on my Sipp in around five years’ time, while spending a quarter of the year living inside the eurozone, specifically Cyprus.
Global equity markets rose by nearly 15% in sterling terms in the first quarter of the year. I was underweight equities in my portfolio, starting the year with 10% cash, increasing that to around 18% in March.
The best performing major market was Japan, up nearly 20% in sterling terms – I held none in my portfolio.
My largest equity holdings were in global emerging markets, accounting for 25% of assets. These lagged significantly, rising in sterling terms by less than half the 15% increase in developed markets.
Finally, I made a foray into specialist commodity funds last year. These have underperformed global equities ever since, with the basic material equity sector flat in the first quarter in sterling terms.
So how did I do?
The first quarter of this year turned out to be a good example of the importance of portfolio construction relative to your portfolio’s performance benchmark.
My benchmark returned 6.3% in the first quarter. Although my portfolio was overweight cash, emerging markets and commodities, and held no Japanese stocks, it still managed to return 7.9%.
Japanese equities are not in my benchmark, so although I missed the rally, their performance represents only an opportunity cost. In my equity portfolio, my exposures for some time now have reflected a barbell strategy, underweight European equities and overweight US and emerging market equities.
One wing of this barbell – emerging markets – lagged in Q1. However, US equities in sterling terms rose by around 19% while eurozone equities rose by only 4%.
UK gilts represent 25% of my benchmark. I have not owned gilts since 2011. Instead I have had 25% of my portfolio in high yield and emerging government bonds which outperformed gilts again in Q1.
Finally, as an individual investor I focus my management mainly on asset allocation and then on manager selection.
My UK portfolio is underweight my benchmark as part of my barbell strategy. My UK equity holdings themselves are spread across five funds. All outperformed the UK All Share total return index.
For a long-term investor, a benchmark is critical in building a portfolio and understanding the success of an investment strategy. Although I have missed Japan and had cash in a strong bull market, I am pleased with the way my portfolio has behaved so far this year.
I do not feel under pressure to jump into prime minister Shinzo Abe’s nitrogen-fuelled rally in Japan. It is not in my benchmark and has risen already by over 50% in the last six months.
Gilts continue to be held at an artificially low yield and offer no value, only risk. The rally in corporate bonds has triggered a slow programme of selling into their strength.
As for my equity holdings, the barbell strategy will remain. The US is the developed world’s most dynamic region.
Emerging markets are a long-term strategic hold as they are the future for global growth and do not have the debt problems of the developed world.
But what about my cash and commodity exposure?
The rally is liquidity-induced on global monetary easing. There is little evidence this is stimulating economic activity.
Rather, the performance of commodity markets has been so poor in recent months that they are pointing to a background of weakening global activity.
In fact, equities and commodities have diverged over the last year to a historically extreme extent. That relationship should correct. So I will hold onto my commodity exposure for now.
As for cash, my own view is that liquidity induced rallies eventually burn out, so I will continue to hold onto cash as well. If I am wrong, hopefully my portfolio construction will again come to my rescue relative to my benchmark.