The manager of the £815 million Artemis Strategic Assets fund, who has taken his net equity position down to 54%, believes equities will ultimately be hindered by the sluggish GDP growth globally, which is reflected in ‘barely growing’ corporate earnings.
However, he said that more importantly, ‘none of the issues that worried investors over the last few years have been fixed.’
He said: ‘European banks still need re-financing and the peripheral countries are still desperately weak. Chinese growth appears to have stabilised, but there are questions over their banking system. The US may have temporarily avoided the fiscal cliff, but these problems will resurface.’
Consequently, Littlewood has sold companies whose profits are more correlated to equities, causing him to cut down his holding in Lloyds by a half and nearly completely sell out of his position in RBS.
Overall, the manager has cut his equity holdings over the last month, with his gross long position falling from 69% to 65% and his short position rising from 9% to 11%, taking the net position from 60% to 54%.
‘Equities still look to offer compelling value compared with bonds, but only because bonds are greatly overvalued,’ said Littlewood. ‘Earnings-per-share forecasts have not been rising, so we are seeing equities being re-rated: that is, investors are willing to pay a higher price for a similar level of earnings.’
Will the equity rally last?
The reason equities and other risk assets have rallied, he argues, is because quantitative easing has driven government bond yields down.
‘Keynesians advocate more spending,’ said Littlewood. ‘This might have worked in the days when government debt to GDP levels was small, but given today’s levels of debt, this does not look like a viable solution.’
He said Western policy, which involves keeping government spending high and making up any shortfall in tax by printing money, means there will either be inflation to the detriment of bonds, or if QE is stopped, then government expenditure will plummet and trigger ‘a nasty recession.’
He added: ‘Equities will react badly in either scenario’.
In terms of other changes to his equities portfolio, Littlewood has been adding to US banks, taking this exposure to 6% of his equity holdings. ‘Banks in the US (which we prefer) have written off more of their bad loans than their European counterparts, putting both themselves and their country in a relatively strong position,’ he said.
‘We reduced our exposure to Japan, largely as a result of selling Japan Tobacco,’ said Littlewood. ‘We continued to reduce our exposure to the UK and added to our positions in the US.’
With regards to bonds, the manager said he switched some of his UK short position in to Japan, which has been the fund’s ‘largest position by far.’
‘The demographics are so poor in Japan, as is the budget deficit, that I cannot see a way out of their fiscal funk that markets will deem agreeable,’ said Littlewood.
‘Currently the bond market is stable, as much of the newly printed money will be spent on government bonds. However one day I expect the bond market to take fright as well.’
He said of those over-indebted, old economies such as Japan: ‘One day, not too far away I suspect, these countries will lose control of both their bond and currency markets.’
Over three years to 31 January 2012, Littlewood has returned 27.2%. This places him top of his Citywire peer group although performance has been more volatile than other funds in the 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 Western debt is unsustainable. So the fund will benefit when appetite for these bonds does meaningfully reverse.