If we had our time again: Lessons learned

Thursday, 29th July 2010 11:24 - by Riddler

Welcome to another month of conflicting data in world equities! Just when the analysts are warning of ‘Double-Dip’ Recession and re-visiting the 2009 Bear market lows, we then have data from the U.K. saying that GDP grew by over 1%. U.S. new homes data also seemed to settle nerves, resulting in a 5,300 FTSE100 and a 10,400 Dow. The truth is that we really are only living from one quarter to another, and my suspicion is that we will only know the health, or otherwise, of the global economy with the benefit of hindsight. Attempts to ‘predict’ 2011 are pretty futile. The context to today’s Blog is the fact that a good friend of mine, who is 47, wanted to transfer his underperforming pension fund into a more ‘hands-on’ SIPP (Self-Invested Personal Pension). He has a good overall knowledge of equities and funds, but suggested that I could help him choose the best places for his £100k pension pot. After 3 years of investing, I felt that I could offer something and could start a portfolio from scratch, hoping to have learnt from all the ups and downs over the past few years. It was a cathartic exercise, almost imagining that I could ‘have my time again’. He wanted, as is sensible, a mixture of Closed Funds, equities, dividend yielding shares, Managed Funds, bonds and cash. 1. Dividend Shares For those looking for income of 4-5%+, it was often advised to go for the steady monoliths such as BP, Astrazeneca, etc. However, I agree with Investors Chronicle, saying that good yields can be found in the FTSE350 and AIM, shares which offer growth and income. These can be stocks such as Stanley Gibbons and Telford Homes. My advice to him was that dividends should be covered at least twice by earnings, and the share should have good growth prospects, improving revenues, and manageable debt. My personal favourites would be in the Water and Utility sectors. 2. Speculative shares He also wanted 5 or 6 excellent growth shares, where they were only just starting to show their true potential. What I have learnt is that you can achieve 1,000%+ gains by picking up these little AIM gems early, but they must have proven their technology, must have started to gain actual contracts and revenues, and must have enough cash to cover the next phase of development. Ideally, they will also have the backing of Institutions and forward thinking Brokers. Where it goes wrong is if these ‘jam tomorrow’ stocks only have one, or even none, of these elements. 3. Natural Resources There may be the odd junior miner in the ‘Speculative’ section, but a better way is to buy into a managed fund specialising in junior miners; as I believe too many natural resource funds are overweight in FTSE100 miners whose growth prospects look limited. My belief is that better value is in the ‘near-production’ juniors. Mark Twain once famously said that a gold mine is ‘”just a hole in the ground with a liar at the top”, and this epitomises the risks of investing directly into juniors if your own research is too limited. 4. Emerging Markets Most analysts agree that India, Vietnam, China and Brazil, amongst others, offer a great opportunity. I have learnt that only a few carefully selected stocks should make up your ‘Emerging Market’ portfolio. The move to urbanised, industrial cities means infrastructure, waste and energy stocks offer a good entry point. I also suggested to my friend that an Asian Fund (excluding Japan) is a good move for more passive investors. 5. Growth shares I have always believed that the best growth comes from the smaller companies who are still trading at unjustified low ratings given their specific growth prospects. There are some excellent ‘green’ funds such as Imax Asset Management who specialise in growth companies in the waste, recycling and clean energy sector. There is also an excellent fund specialising only in AIM stocks, whilst some very good funds specialising in the very risky sector of junior bio-techs are available. London South East is not regulated to provide Financial Advice. The recounted story and views of the author (above) are theirs and theirs alone, and should not be construed as Financial Advice to visitors to lse.co.uk. If you require Financial Advice, you should speak with an Independent Financial Adviser or Broker.