Mr Littlewood noted that a long-dated government bond from Brazil yielded 13.9 per cent. He said this was good value because it meant he received a real yield – the yield of the bond minus the country’s 5.9 per cent inflation rate – of 7 per cent.
Mr Littlewood contrasted Brazil with Japan where he said the 0.6 per cent bond yield “looks 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 short position on Japanese bonds, a bet that will gain money if the bond’s value falls. The 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 – again to benefit if the currency weakens.
The short positions, which Mr Littlewood also has in US, UK and French government debt, have proved to be a drag on the performance, as has the low net exposure to equities during the equity bull market that has marked much of the fund’s life.
The fund is in the third quartile for performance in the IMA Flexible Investment sector since its launch, as well as in three years and one year, according to data from FE Analytics.
In spite of its underperformance during the equity bull market of the past five years, Mr Littlewood’s fund is included on most lists of recommended funds from discount brokers and wealth managers.
This is because Mr Littlewood’s arguments about a structural, debt-driven decline in the west are so convincing, especially as the west continues to see debt levels rising even as countries such as the US and UK embark on ‘austerity measures’.
But the fund’s aim is to beat both cash and equities over rolling three-year periods and it just isn’t doing it. Mr Littlewood needs his big macro calls to pay off soon.
The case for buying Brazilian debt and shorting Japanese debt
Artemis’s multi-asset manager William Littlewood has long been known for his bearish view on Japan. He believes the high debt level in the country, combined with its aging population, means the country is on a downward spiral. He remains unconvinced by the radical new measures implemented by Japanese prime minister Shinzo Abe, even though the markets have reacted positively, hurting Mr Littlewood’s negative bets.
In contrast, Brazilian assets have sold off significantly in the past year as investors fear a slowdown in emerging markets. However, Mr Littlewood thinks Brazil is in a much better economic situation, with a young and growing population and low debt levels.