Tactical Asset Allocation Shift

Following my last post in which I stated I was taking a more active role in asset allocation advice you may be aware that last autumn concerned we were heading for a stockmarket crash from the Eurozone debt crisis I switched my pension fund to cash. This is despite the fact that I am bullish on equities as a long term investment. They remain my favoured asset class. Corporate balance sheets are generally strong with the significant deleveraging that has taken place in recent years and companies hold large cash balances. Valuations are also good both in absolute terms and relative to gilts and corporate bonds. In my view equities have suffered in the last few years from the sins of the bond markets and the profligacy of government debt. This has meant equities have been priced not on fundamentals but “risk off” sentiment and good quality companies have been sold indiscriminately.
The crash has yet to happen and may not, but I have targeted the FTSE 100 index, a proxy for global stockmarkets hitting 4,000 as a trigger for me to rush back into equities. The intended temporary switch to cash was therefore a tactical asset allocation decision. If I get it right I’ll make a significant profit – if I get it wrong and eventually buy back into equities at higher prices than I sold out at I’ll take a hit.
Last week during a review of a client’s portfolio I spotted an excellent buying opportunity that should have been blindingly obvious to me earlier – that commodities and mining and natural resource companies had fallen sharply in the last year. One favourite fund of mine, the JP Morgan Natural Resources with a long track record of excellent performance was down 30.1% to 22/6/12 (Source: Morningstar). The downturn is due to slowing global economic growth especially in China and fears of a Euro break up. Commodities are very economically sensitive and hence prices are highly volatile. However the long term investment case is compelling – with a rising global population, strong economic growth in emerging markets and limited supplies of commodities. It is classic market with favourable long term supply and demand characteristics. Consequently I expect a strong rebound at some stage in commodities and resource companies. So I decided to re-invest 25% of my cash into the JP Morgan fund. I’ll let you know in due course how I get on.
Now I am a high risk investor and there is a real risk that commodity prices may fall signficantly further or stayed depressed for longer, but this was an opportunity that I could not resist. For investors sitting on cash or looking to invest this year’s ISA allowance you could do no better than consider a similar exercise although this is not for the faint hearted. Naturally individual advice would be required and you should not consider the JP Morgan Natural Resources fund as a definite recommendation for you. Finally you should note there are alternative buying opportunities. The average IMA Europe (excluding UK) fund is down 17.5% in the year to 22/6/12, the average IMA China/Greater China fund is 14.9% lower and several India funds have fallen by more than 20%.
Finally to end on something I have banged on about previously – monthly investment. When I switched to cash last year I maintained my regular monthly pension contributions and continued to invest in equity funds. I figured with the downturn in prices following the re-emergence of the Greek financial crisis in August and a possible crash I would pick up units cheaply. A prolonged period of depressed values is highly beneficial when followed by a rally in prices. The risk reducing features and investment opportunities of regular savings is not widely adopted enough by investors who are holding onto cash. I have noticed a significant downturn in new investment since August. In my view risk adverse investors who are not prepared to commit lump sums should seriously consider a flexible regular savings plan instead for example using ISA allowances. These have low minimum contributions, typically £50 p.m. and there is no minimum term unless they are life assurance based. Savings can be suspended at any time and investment trust savings schemes offer a low cost option.