Mark Dampier: Missed targets at Artemis, but fund will still come good
Saturday 04 August 2012
During the 1990s, William Littlewood ran one of the most successful funds in the UK, Jupiter Income, before stepping back from fund management for a few years. His eagerly awaited return was at Artemis, where he was given the freedom of a fund investing in wide range of assets. He is famed for his shrewd macro-economic views, and Artemis Strategic Assets was a vehicle designed to fully harness his talents.
The fund launched in May 2009, and it seems an appropriate time to review the fund, as its objective is to beat both the FTSE All Share index and cash over rolling three-year periods. Any such twin aim is difficult for a fund manager. Enough risk needs to be taken to keep up with the market, but capital also needs to be protected in the event of falls in order to outperform cash. It means owning the right asset classes at the right times – a tough task for any investor.
Unfortunately, over its first three years, the fund, while beating inflation, has not outpaced the All Share index. Looking at the make-up of the fund, it should not come as a huge surprise. Having a wide range of assets encompassing commodities and currencies has somewhat diluted the strong performance of the fund's equity holdings. In addition, Mr Littlewood can "short" assets he believes will fall in value, aiming to profit from any decline in price. This ability could be an advantage, like any other technique, if the manager gets it right. But his decision to short government bonds including UK gilts and US treasuries has been a mistake: Since launch, the strategy has cost the fund around 13 per cent of its value.
The day the fund was launched I argued with Mr Littlewood that I saw no need to short government bonds, at least for the time being. While I had sympathy for his reasons (that bond yields were far too low given persistent inflation), I felt the amount of forced buying, especially in the UK from the Bank of England, pension funds and banks, was likely to keep gilts yields moving down. In a recent telephone conversation with Mr Littlewood, I found him more entrenched in this view than ever, not surprising given 10-year gilts are yielding just 1.5 per cent. The upside is now clearly limited. His view is that when the sovereign debt collapse comes, which he is convinced it will, it will happen so quickly that unless you have the trade already on, you will miss it.
Mr Littlewood has undoubtedly become more bearish this year, gradually reducing equity positions during periods of strength. Having built up 27 per cent in cash, he is also shorting the euro, feeling it is only a matter of time before matters in Europe escalate. At the same time, he is adding to his holding of Swiss francs as he believes the currency's peg to the euro will eventually break. He is also keen on gold, and keener still on platinum whose price per ounce is trading below that of gold - an unusual occurrence.
Platinum usually trades at a premium, and has been as high as 25% above the gold price. The reasoning behind these precious metal positions, as well as his bearishness on bonds, is his belief that the only way out of the debt problem in Western economies is inflation, an environment that should favour 'hard' assets.
Despite a mixed start for this fund in its inaugural years, Mr Littlewood remains one of my favourite managers. Strictly speaking, three years is a very short time period to judge a fund, and outstanding success earlier in his career provides evidence of his skills.
It has also been a period that has wrong-footed many good-quality managers, in part because the unpredictable actions of politicians have exerted significant influence over markets. However, markets are too big to control in the long term. There will come a time to be short government bond markets and I suspect this fund will be a good one to hold at that time.
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.h.l.co.uk/independent
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