William Littlewood, manager of the Artemis Strategic Assets fund, slashed his exposure to Japan ahead of the sharp overnight sell-off and has been a ‘gentle buyer’ of gold after its recent fall.

He has topped up his position, following a near 20% drop, taking the portfolio’s commodities position to 10%. Half of this exposure is directly in gold and despite the sudden fall leaving some investors questioning  its merit, Littlewood is not fazed. In fact he believes its fundamentals have become even stronger this year.

‘Conditions are still extremely powerful for gold and the main reason comes back to sovereign debt. I don’t see a way of governments successfully unwinding quantitative easing or central bank policies,’ he says.

Given that negative real interest rates look set to continue provides him further comfort to say the outlook for gold is very good.  There is also a further 4% holding in precious metal equities within the multi-asset portfolio.

‘Bond market will rebel’

As market moves in recent years have centred around quantitative easing and central bank actions, Littlewood doubts there will be a successful way of unwinding these policies.

‘I think one day the bond market will rebel against this and very sharply indeed. If a sovereign debt crisis hit us tomorrow, it would go around the world quickly,’

This is why the Japanese bond market is being shorted as the country is the most indebted in the world. He believes there is a good chance that the yield will go up a ‘long long way’ in years to come.

Hyper-inflation warning

Littlewood also warns that if inflation increases, it will be difficult to see interest rates going up. He thinks it would be an impossible scenario for Europe, it would do extreme damage to the UK housing market and almost bankrupt Japan.

And with quantitative easing being the recurrent policy tool, the upshot is clear in Littlewood’s eyes. ‘History shows there will always be a stage of hyperinflation if you print and print and print. From all the outcomes this is the most deadly as it kills economies. Governments reneging on their debt is painful at times but it will wash through the system.’

Although the government bond market rally has impacted on performance, as his positions look to profit from these rising, he believes there will be a strong reversal down the line.

‘One day I think the central bankers will lose control of their bond markets which means there’ll be inflation so government bond yields will go up a long way.’

Equity exposure at historic low

With the strong equity rally also linked to government intervention, Littlewood believes any attempt to withdraw printing money programmes will have a bad effect on shares. This is why he has cut the net equity exposure to 47%, a historic low in the fund’s four year life.

Profits have also been taken and 26% of the £880 million is in cash, as Littlewood is ready to wait for a pullback and redeploy this at more attractive levels.

‘Shares look extremely cheap versus bonds but the problem I’ve got here is that when bond yields normalise, shares will no longer look cheap. Equities have been strong but most of it has been a rerating rather than greater growth and it is hard to see profits go up from here’.

Holdings are focused on large caps as this is deemed safer. At a country level, half the exposure is to the UK and nearly a third in the US. Up until recently Japan had been a 7% position but this has been cut to just 1% remains following the strong rally.

The fund also has exposure to currencies where the underlying countries are benefiting from a current account surplus such as the Singapore dollar and Malaysian ringgit. Whilst further gains are looking to be made from a weakening yen and euro.

Since launch in May 2009 to 30 April 2013, the fund has returned 50.3% versus 38% for the sector average in the Multi Strategy sector.







Citywire Selection Verdict: William Littlewood invests across equities, bonds, commodities and currencies. He is also able to use shorting powers which aim to profit from market falls. Although exposure is diversified, the fund has tended to have a similar performance pattern to that of equities. This is because Littlewood is heavily shorting Western government bonds that have rallied during periods of risk aversion. His macroeconomic approach makes him believe yields on Western debt are unsustainable. So the fund will benefit when appetite for these bonds does meaningfully reverse.

For more details view the latest factsheet .