Inflation fell to the Bank of England’s (BoE) 2 per cent target in December for the first time in nearly five years, but the manager is not convinced it will remain so low. He says the bank could be pressured into raising rates earlier than it wants if inflation picks up, despite governor Mark Carney’s statement that he would refrain from doing so.
“If any inflation comes on the horizon, they could easily get stuck in quite a dilemma,” he said. “We’ve got a housing market here which is heating up quite fast and if there’s a little bit of inflation on that [it would be a problem].”
While inflation dipped slightly at the end of last year, unemployment in the UK is rapidly falling towards the 7 per cent level where policymakers will start considering a rate-rise. The current unemployment rate sits at 7.4 per cent.
The manager warns that there is reason to believe inflation could start to tick up, with a negative impact on UK equities.
“The great surprise over the whole of this cycle so far has been how low inflation has been in developed markets,” he said.
“As the economy warms up and as labour becomes more sought after, then people are going to be more inclined to ask for pay rises. That’s where inflation starts.”
“So just because we haven’t had any inflation over the last five years, it doesn’t mean that we won't get more now. I’m not talking very much, but just a little bit more than we’ve had over the last couple of years.”
“If that happens, then it will make it more difficult for equity investors to make progress.”
However, he is much more positive on central bank intervention in the US, the country that makes up his largest regional exposure in his Artemis Global Select portfolio.
“2014 clearly is the year when tapering happens, when quantitative easing is withdrawn. By implication that is the start of tightening,” he said. “The tightening phase of an economic cycle is normally quite difficult for investors.”
“We feel that tapering so far has been handled rather well.”
“The federal authorities signalled to the market what they were going to do during last year and that allowed the 10-year bond in America to go from yields we thought were dubiously low – you really weren’t being offered very much in risk-free rates in America – to yields which are now much more acceptable and much more normal.”
“And they managed to do that between spring and the end of last year without it damaging the bull market in equities. So we’re feeling rather enthusiastic about federal authorities, we think they’ve handled things quite well.”
However, Edelsten believes his fund should be able to withstand these macroeconomic events, even if inflation or tapering send shockwaves through the market. He says this is because he aims to invest in companies that are not significantly affected by the economic cycle.
“We think our style of investing can produce good returns even if equity markets have a tricky time this year,” he said.
The £40.9m Artemis Global Select fund has lagged behind the global rally recently due to its focus on all-weather companies that can withstand down markets, as Edelsten explained in a recent interview with FE Trustnet. This has resulted in disappointing returns over the last six months.
Edelsten says the biggest reason for the performance dip was a rough patch in August when Japanese equities, which also make up a large portion of the fund, and emerging markets fell in tandem.
The manager says this was an unusual event because traditionally the two regions are not correlated.
“There are good, fundamental reasons why they shouldn’t be,” he said. “If emerging markets are being affected by US tightening, Japan, of course, is loosening. Japan is increasing quantitative easing just at the point in time where emerging markets may be affected by a reduction in quantitative easing.”
However, Edelsten says he takes a much longer-term view, looking for companies that will survive hiccups in the macroeconomic climate.
“We try to find stable, long-term drivers of growth, so things like the trend towards internet shopping and the effect of the aging population,” he said.
“It’s looking for these long-term stable trends that’s really paid off for us. It does of course mean that the portfolio tends to have a collection of high-quality companies that can look after themselves, but it also means it does not have many companies that are cyclical.”
“In a year like the last one, it was quite difficult for our high-quality companies, which should do well in most economic situations, to keep up with the global equity markets which were sensing an economic recovery.”
However, over the last 12 months the fund has outperformed the MSCI World index and returned only slightly less than the average fund in the IMA Global sector.
The fund has made 30.08 per cent since launch in June 2011, edging out its benchmark and outperforming the sector over the period, according to FE Analytics.
Performance of fund vs sector and index since launch
Source: FE Analytics
Edelsten is a fan of some of the biggest technology companies out there, with Apple and Google making up some of the largest holdings in the fund.
He and co-managers Alex Illingworth and Rosanna Burcheri also hold American credit card brand MasterCard, oil exploration and production giant Marathon Oil and US-based medical technologies firm Stryker Corporation.
North America makes up the largest chunk of the portfolio, at 43.1 per cent of AUM. Europe is the second-highest regional bet, at 16.6 per cent, followed by Japan, which makes up 15.8 per cent of the fund.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.78 per cent.