Pension Diary: Turning my Sipp into 1m

April 4, 2006Andy No Comments »

Barnett Alexander, The Herald

I set myself the challenge of turning my self-invested personal pension from £122,000 into £1m in three years, starting on July 1, 2005.

To help me, I use contracts for difference, CFDs, which are stock substitutes and provide me with gearing several times my initial capital. For example, when starting, I was able to have exposure of nearly £1m, about eight times my starting capital which, if handled correctly, can enhance returns considerably.

At the start of this year, my pension was valued at £150,000. By the first week of February, it had risen to £180,000 and by the third week of March (the time of writing) has risen to £230,000. That is a 50% increase in less than three months.

Certain points emerge. I notice, for example, that from Monday March 6 to Wednesday March 8, the pension dropped from £205,000 to £180,000. So great was my pain on that Wednesday afternoon, with all the stock markets falling and Wall Street expected to drop 100 points on the open market that I had to leave my office and seek refuge on the driving range. Otherwise I might have panicked and sold at the bottom.

Of course I did not know that this was the bottom at the time, but I realised when I came back that the 100-point drop from Wall Street had not materialised and, in my experience, this was a “tell” that the fall was not going to continue.

It would have been an appropriate punishment for me if I had sold on the Wednesday only to see the market rally to over 6000 for the first time in five years. The market is a femme fatale adept at relieving us of our money and making us feel foolish at precisely the time when we should be increasing our exposure, not decreasing it.

These sorts of leveraged gains (and losses) are quite common in currency markets, which are relatively stable by comparison to individual shares but, until recently, were unheard of in the UK.
In fact, prior to the introduction of CFDs, the private investor was limited to dealing in traded options or dealing on extended settlement.

Traded options have never caught on in the UK and consequently are only available on a limited amount of shares, whilst dealing on extended settlement is ham-fisted and very expensive. CFDs are available on every share for as long as you require and, when held within a Sipp, there is no tax to pay on the profits.

Not surprisingly, a raft of new firms have been set up to meet the demand, and three have floated on the stock exchange – IG group, London Capital (which operates the spread betting company
Capital Spreads) and IFX.

In addition to CFDs on UK and US equities, all firms offer indices, currencies, commodities and interest rates – all of which can be traded as spread bets. There is also the lucrative sport betting market (which will be a money spinner over the period of the World Cup). All three companies reported results in line with robust trading in most markets, and I have a position in IG group in my pension and IFX in my personal equity plan.

I recently established a position in Aero Inventory in my pension. The company is a wholesaler of aircraft parts and reported strong six-month results. However, these results could not take into account the £92m the company rose through a placing at 433p and a rights issue at 300p – more than doubling its market capitalisation and allowing it to tender for bigger contracts. New forecasts are for pre-tax profits to rise from £6.8m to £11.9m this year, jumping to £28.7m in 2007-08, equivalent to a price/earnings ratio of 30, then 16.8 falling to 6.9 – very cheap.

Barnett Alexander is a director of Echelon Wealth Management Limited.

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