great expectations

great expectations

October 5th, 2010

May 2009 saw one of the more hotly anticipated launches of recent times as William Littlewood returned to running retail money as manager of the Artemis Strategic Assets fund. Here he talks to Julian Marr (editorial director of about its first year and future prospects Investors can have the memories of goldfish but, when it comes to people who have made them money, their powers of recall markedly improve. Thus the return to retail fund management of William Littlewood, whose stewardship of Jupiter Income made it a must-have holding in the 1990s, was greeted with great excitement. One year on, has his £567m Artemis Strategic Assets portfolio lived up to expectations? “The fund’s objective is to beat cash and equities over rolling three-year periods while looking to be as fully invested as possible in rising markets and offering some – but definitely not total – downside protection in falling markets,” begins Littlewood carefully. “After the first year or so, the fund was a couple of percentage points ahead of the All-Share and when the market dropped sharply, which it did on two or three occasions, the fund tended to go down by about half the market fall. So, in that sense, we’re quite happy.”Not that Littlewood is resting on his laurels – indeed, when asked if that means the first year might actually have exceeded his own expectations, his immediate reaction is to consider how he might have done better. “With the benefit of hindsight, I was probably too cautious with regard to both economics and stockmarkets,” he says. “We were generally between 50% and 70% invested in equities – on a net basis, which allows for shorts as well – while our cash position was generally between 15% and 25% of the fund. So we achieved our return without being fully invested by any means, with most of the return coming from good stockpicking and successful investing in the currency part of the portfolio.” As of 30 June 2010, the fund had a long position in equities of 83.2%, with 7.5% in commodities and 9.3% in cash. It also held short equity positions totalling 3.1% while its government bond shorts were equivalent to 66.7% of the portfolio’s net asset value. “That sounds like a huge number,” says Littlewood. “But, because the yields on the bond shorts are so small, the loss the fund absorbs is quite small when, as in June, yields fall sharply. When one shorts a share, the theoretical downside is unlimited but that is not the case with bonds where the downside is limited to the bond’s yield times its duration.”

Lurking fear

So why is the fund short government bonds? “Two reasons,” says Littlewood. “We expect inflation to be worse than people think and that’s broadly happened, particularly in the UK. But there is also the fear lurking behind the sovereign debt crisis – that some governments won’t be able to repay their debts – and that issue will stalk all bond markets going forward. “Investors have been piling into government bonds because they’re scared of government debt default in other parts of the world so, paradoxically, they’ve been running into the asset that originally scared them. This issue will be with us for a long time, partly because debt-to-GDP ratios are so high but also because demographics, particularly in the old world, are very bad – for example, the World War Two baby-boom generation starts turning 65 next year. “People are living a lot, lot longer too and that means more pension payments, more healthcare and so on and, in the end, that is going to force all mature governments to change their model. You’ll se more people in their late 60s working in the next 10 years, but it’ll be a long and difficult transition because people’s expectations are still that they reach a certain age and then retire. In some cases, that’s not going to happen.” Does the portfolio’s composition imply a bullish stance on equities then? “I wouldn’t describe myself as that although I much prefer equities compared with government bonds and cash,” Littlewood replies. “Equity prices have come back quite a bit and corporate profitability is stronger while government bonds are grossly mispriced and cash gives you very little in this country. Everything I read suggests interest rates are going to be low for a long time to come. “In some ways, I like equities by default. What I am convinced of is real interest rates – that is, nominal ones less inflation – will be negative for quite some time and that’s not a good environment in which to be holding cash. One of the major planks of my investment thinking is we are making the transition from deflation to inflation and it will be a bumpy ride. Historically, unanticipated inflation has caused PE ratios to fall and markets to drop. “The whole sovereign debt crisis in its various guises is another negative but then the positive is that corporate profitability is quite strong and where else do you put your money? We would be looking to buy shares, particularly when they have bad patches, and we would also tend to be sellers on shares rising in price because the outlook is not an ideal bull market – you can’t buy and hold for three years. These will be choppy markets.”

Big change

A big change to the portfolio over the last few months stems from Littlewood’s view on the pound. “Until a couple of months ago, we’d always run with a position of between 20% and 40% short of sterling but I’ve reversed that now,” he says. “Having gone from a peak short position on sterling of minus 40%, we are now plus 22%, so that’s a 62% swing. “We have done this partly because sterling has fallen quite substantially against most currencies in the last two years but it’s also to do with the nature of the new Government. One of the big reasons you can worry about sterling is the public finances in this country – and that’s still a very legitimate cause for concern – but I’m clear in my mind the new Government will show quite strong resolve to attempt to sort them out. “So we’ve now got a centre-Right Government – admittedly a coalition but still centre-Right and broadly business-friendly – and it has made cutting the public deficit its number-one objective. That to me is a positive situation and I also get the impression the Tories have ceded a lot of social policy to the LibDems with the quid pro quo being they get a lot of their way on economic policy. So I’m much more optimistic than the consensus or the market on both the durability of this Government and its likely impact on the UK economy. “If there was any sense it was going to break down, then it becomes a different ballgame but I really think the political will is there – even the media are not attacking the Government quite as much as it might. There’s a lot of hope this Government will work because, if it doesn’t, it is a mess. In some ways, the people have voted for a hung Parliament and now they’ve got one. It’s a very brave decision of the Conservatives to embrace the LibDems and I just think a lot of people want this to succeed.” When the fund was launched, the hope was its Ucits III powers would serve to offer the best of both the unit trust and hedge fund worlds. One year on, does Littlewood still believe this is the right fund structure for him? “The fund is tailored to my skill base,” he replies. “We principally own UK and US shares with the balance mainly in Europe and I’m very happy with that. “I’ve also been able to short government bonds and, while we may have lost some money there, I believe we will eventually make money doing that. Finally, I can invest in any currencies around the world – for example, we’re long the Asian currencies, excluding the yen, and, in the main, short the mature countries. I’m happy with those positions too and indeed with the flexibility the fund offers me.” CV:William Littlewood William Littlewood graduated from Bristol University with a degree in Economics. From 1989 to 1999, he worked at Jupiter Asset Management, where he managed £1.6bn in top-performing assets. He joined Artemis in December 2005 to launch the Absolute Return Hedge portfolio and now manages the Artemis Strategic Assets fund. In managing this fund, William adds the resources and expertise of Artemis’ 15 other fund managers to his own extensive experience of multi-asset investing. One to watch we think! –For all your investment requirements please call Mark or Clare at GMP Independent Financial Advisers LLP on 02072886400  

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