March 16, 2014 4:25 am

Artemis ultra bear reverses view of emerging markets

Artemis Strategic Assets fund

Artemis’s William Littlewood has reversed his ultra-bearish view of emerging markets for the first time since he launched his flagship £998m Strategic Assets fund in 2009.

Mr Littlewood believes emerging markets are now in a better position than their developed counterparts. This contrasts starkly with the view of Jupiter’s investment chief, John Chatfeild-Roberts, who earlier this month said 2014 would be a year in which focusing on developed-market equities would win out as emerging markets suffer from the US Federal Reserve reducing its monetary support.

Mr Chatfeild-Roberts spent much of 2013 revising his range of Merlin fund-of-funds portfolios to reduce focus on emerging markets, which corrected sharply amid the US Fed move.

But Mr Littlewood has been adding to emerging market equities and is about to start buying emerging market bonds, according to his latest investor update.

Emerging equities now make up 5 per cent of the portfolio, which the manager says is the highest level since the fund’s launch and is up from zero a year ago.

The position is split mainly between Russian oil and gas companies and Samsung Electronics, the South Korean group, although Mr Littlewood is also investing in two emerging market investment trusts that are trading on wide discounts.

He says: “The structural issues faced by the developed world are far more challenging than those in the developing world.

“So, where we can, we are gently shifting the portfolio towards emerging markets.”

He said emerging market companies were trading at significant discounts to developed market companies, the biggest discount in either five years or 10 years, depending on the valuation metric used.

He acknowledges the potential risks facing the countries, saying some of them could be “on the verge of a nasty recession”, but that it would be a cyclical slowdown from which they would rebound quickly.

Mr Littlewood says he is close to investing in emerging market debt within the Strategic Assets fund as well.

He notes that a long-dated government bond from Brazil is currently yielding roughly 13 per cent. He describes this as good value, based on its real yield – the yield of the bond minus the economy’s 5.9 per cent inflation rate – of 7 per cent.

Mr Littlewood contrasts Brazil with Japan, where he says the current standard bond yields of closer to 0.6 per cent “look ludicrously low, given that inflation is 1.6 per cent and there are serious question marks over the country’s long-term solvency”.

The manager has a long-held short position on Japanese bonds. The major position is equivalent to 64.5 per cent of the net asset value of the portfolio.

As well as the short bond position, Mr Littlewood has a 21.2 per cent short position against the Japanese yen – to benefit if the currency weakens.

These positions have proved to be a drag on his performance in recent years. The fund ranks in the third quartile of the IMA’s Flexible Investment sector in terms of its performance since launch, as well as its performance in the past one and three years, according to FE Analytics, the data provider.

Matthew Jeynes is senior reporter at Investment Adviser

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