Mark Dampier: Despite sovereign debt drag Littlewood still plays it short
Friday 21 December 2012
William Littlewood's return to the investment world after a nine-year gap in May 2009 caused a stir.
He was a star performer of the 1990s managing Jupiter Income, and the eagerly awaited Artemis Strategic Assets Fund attracted a lot of attention, deservedly so in my view as Mr Littlewood is a first-class manager.
Yet the fund has failed to shine. While it certainly hasn't been a disaster, rising by around 38 per cent, the aim is to beat both the FTSE All-Share index and cash over any three-year period. During this time the All-Share is up 56 per cent with dividends reinvested.
To be fair, these twin objectives are quite tricky to achieve. It essentially means the manager has to take a very flexible approach to the level of risk in the fund, sheltering capital in turbulent markets and taking a more aggressive approach when they are rising. Therefore timing and strategy are extremely important. As such, the fund offers Mr Littlewood considerable scope to follow his views. He can invest in shares, bonds, commodities and currencies, which the manager believes will increase in value. The fund can also use holdings that increase the fund's value if they fall in price, known as "going short".
While flexibility can be a good thing as it gives a manager various ways of making money, it also means there are more ways of losing money.
Although many parts of Mr Littlewood's portfolio have fared well, one area has been a particular drag. Since launch he has strongly believed that sovereign debt, particularly in Western markets and Japan, was vastly overvalued and that inflation would cause falling bond prices. He has therefore shorted UK gilts and US treasuries as well as Japanese government bonds. I argued with him that it was far too early to short sovereign debt, even though I thought he may be right in the longer term. Sure enough, these positions have been costly and he would have beaten returns from the FTSE All-Share since launch if he hadn't taken them.
When I caught up with him recently I found he is as adamant as ever about shorting bonds. His view is that when bonds do sell off it will happen very quickly and many people will miss the trade. On Japanese bonds he remains particularly bearish as they are predominantly held by aging, private investors. When they begin to sell to release capital he believes few other investors will be interested in yields of 0.7 per cent on an investment in an expensive currency. If we are, as Mr Littlewood believes, near the crunch point, the fund is very well placed.
As for equities, he thinks some of the classic defensives have got a little expensive and has moved more into the US with the UK weight falling.
The fund's currency exposure is also interesting with long positions representing 30 per cent of the fund in the Singapore dollar, 12 per cent in the Taiwanese dollar, 11 per cent in the Hong Kong dollar, 11 per cent in the Malaysian ringgit and 17 per cent in Norwegian and Swedish krone. There are also short positions in the Australian dollar, Japanese yen and the euro. Overall the fund is set up to benefit from a decline in sterling.
So how does this fund fit into a portfolio? I have a large weighting in my own self-invested personal pension because although I haven't shared Mr Littlewood's short-term view, I do share his longer-term strategic thinking. At some stage I think sterling will come under pressure, so his overseas currency weightings will start to work well and at some stage sovereign debt will surely go into reverse.
This is a fund for patient investors who think the problems caused by indebtedness around the world will eventually be solved by inflation. The question as ever is one of timing, so I have this fund as part of an insurance policy if things go wrong. I still consider Mr Littlewood to be one of the best fund managers I have met over my 30 years in the industry, so if you do own the fund I think it's worth holding onto. For those who don't, it's worth considering, particularly if your outlook turns more bearish on sterling.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
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