Mr Littlewood, who has been vocal on his lack of conviction in the recovery in developed markets in the past five years, believes that emerging markets now look to be in a better position than their developed counterparts.
The view contrasts starkly with that of Jupiter’s investment chief John Chatfeild-Roberts, who said last week that 2014 would be a year in which focusing on developed-market equities would win out as emerging markets suffer from the US Federal Reserve reducing its monetary support.
Mr Chatfeild-Roberts spent much of 2013 revising his range of Merlin fund-of-funds portfolios to reduce focus on emerging markets – which corrected sharply amid the US Fed move – and switch to developed-market stockpickers instead.
But Mr Littlewood has been adding to emerging market equities and is about to start buying emerging market bonds, according to his fund update.
Emerging market equities make up 5 per cent of the portfolio, which he said was the highest level since the fund’s launch and is up from nothing a year ago.
The position is split mainly between Russian oil and gas companies and Samsung Electronics, although Mr Littlewood is also investing in two emerging market investment trusts that are trading on wide discounts.
In addition to the direct exposure, Mr Littlewood said he had a further 3 per cent of the fund in developed market banks with heavy emerging market exposure such as HSBC, Standard Chartered and Citigroup.
Mr Littlewood explained the negative sentiment towards emerging markets in recent years showed his “longstanding caution towards emerging markets has been justified”.
“But as valuations decline we are becoming more constructive,” he added.
“The structural issues faced by the developed world are far more challenging than those in the developing world.
“So, where we can, we are gently shifting the portfolio towards emerging markets.”
He said emerging market companies were trading at significant discounts to developed market companies, the biggest discount in either five years or 10 years, depending on the valuation metric used.
He acknowledged the potential risks facing the economies, and said some of the countries could be “on the verge of a nasty recession” but said it would be a cyclical slowdown from which the economies would rebound quickly. This is in contrast to the long-term structural decline that he sees enveloping the developed world.
In addition to the growing emerging market equity position, Mr Littlewood revealed that he is close to investing in emerging market debt within the Strategic Assets fund as well.
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.
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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.
He thinks the recent sell-off in emerging market assets has presented an attractive buying opportunity, particularly in Brazil.
