Uys says the divergence in valuations between developed and emerging economies has opened up a number of investment opportunities in developing markets, but for a cautious fund such as Insight Absolute Insight portfolio, the sector is still too volatile. “The dynamic between global growth within emerging markets and the developed markets remains interesting,” she said.
“In particular, we think that fundamentally there’s not a shortage of opportunities in emerging markets, but it’s the technicals that are preventing us from going back into that asset class.”
In spite of the strong market rally from US, UK and European markets in 2013, emerging markets ended the year down nearly 4.5 per cent. Emerging markets continued to bounce along in negative territory when developed markets took a dip in January trading.
Emerging markets are down more than 13 per cent over the past 12 months, diverging widely from the gains of the developed world. The S&P 500 made 15.73 per cent over the period, while the FTSE All Share is up 11.56 per cent and the MSCI Europe index gained 12.33 per cent.
Performance of indices over 1yr
Source: FE Analytics
Many experts argue that it is a good idea to invest in a particular asset class or sector after a sustained period of underperformance, but Uys thinks emerging markets are just too bumpy to go back into yet.
“We want to sit on the sidelines and wait for markets to calm down,” she said. “But if anything the projected global growth within emerging markets is still higher than we see in developed markets.”
The manager says the team at Insight is particularly negative on the outlook for China, pointing out equities are vulnerable to a correction as a result of tightening domestic consumer spending.
However, due to the long/short structure of the portfolio, Uys says the Insight fund can protect shareholders' cash even if its base case scenario that Chinese equities will fall is proved incorrect.
“If you look at the historical correlation between Chinese equities and commodities, as well as Chinese equities and the Australian dollar, Chinese equities have been lagging,” she said.
“Commodities and the Aussie dollar are both down but Chinese equities haven’t quite gone down that much yet. So our conclusion is that we think it’s vulnerable to a correction.”
Uys is also wary of the recovery in the US economy. She highlights last week’s disappointing payroll numbers, which contrast with falling unemployment.
“If payroll numbers are again negative, the US may want to postpone tapering,” she said. “But that would then give a negative message to the markets.”
“On the flip side, do they then decide to lower their unemployment targets against the tapering to use it as an excuse?”
Uys says as a result of this developed market headwind, she expects to see stronger growth from peripheral nations.
For example, the team is more positive on Spanish bonds, which is why it is taking a long position on debt from the country and a short position on German Bund futures.
“Within developed markets we have more of a preference to peripheral growth than we do to the likes of the US and Europe,” she said.
Uys previously stressed that it is vital for investors to understand what their absolute return fund is trying to do. In a recent interview with FE Trustnet, she explained the key questions investors need to ask.
FE Research analysts say the fund is one of the best products on the market for cautious investors who are looking for consistent returns ahead of cash year-in and year-out.
Uys runs the four crown-rated fund alongside FE Alpha Manager Reza Vishkai. It has beaten its peers in the IMA Targeted Absolute Return sector over three and five years, although it has lagged behind the sector average over the last 12 months.
It has also consistently beaten cash, delivering 31.42 per cent over five years while the cash benchmark is up just 3.37 per cent, according to FE Analytics.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
What is more important to investors in this type of strategy is how the fund performs over the short-term. Insight Absolute Insight has managed positive returns ahead of cash in every calendar year since launch apart from the market crash year of 2008. It was down 0.17 per cent in that 12-month period, compared with losses of 3.6 per cent from its peers.
The Insight fund managed positive returns of 0.24 per cent in the down market of 2011, although this was slightly behind cash, which was up 0.75 per cent.
Source: FE Analytics
The £585.7m fund is also one of the best in the sector in terms of risk-adjusted returns. It has the fifth highest Sharpe ratio of 0.97 over the last five years, behind Newton Global Dynamic Bond, S&W The Tenax, Henderson European Absolute Return and Premier Liberation Absolute Growth.
The multi-asset portfolio invests in six of Insight’s absolute return funds including the Absolute Insight Equity Market Neutral fund, the Absolute Insight Currency fund and the Absolute Insight Credit fund.
Insight Absolute Insight requires a minimum investment of £5,000 and has ongoing charges of 1.32 per cent.
