Ricketts, who heads up various funds of funds at Margetts, recently told FE Trustnet that he thinks struggling emerging market equities will now start to outperform the likes of the US and UK because valuations have become overstretched.He says that, as a result, now is the time for investors to switch around their portfolios.
“I think we will start to see emerging markets beginning to outperform through this year and come through much more strongly in 2015 as I think we are seeing a bottoming out process in March,” Ricketts said.
“Yes, I think equities will continue to outperform bonds but anyone who is thinking that US and UK equities can return 30 per cent again this year needs to re-calibrate their positioning. Last year, you basically had two years’ worth of returns in one.”
He added: “I think returns will be broadly flat this year as company earnings need to catch up with current equity ratings.”
With this in mind, Ricketts tells FE Trustnet about one fund he has been buying, one he has been trimming and another he has completely sold out of.
Buy – Somerset Emerging Markets Dividend Growth
The manager has been buying up units in the five crown-rated Somerset Emerging Markets Dividend Growth fund in an attempt to capitalise on the emerging markets rebound.
Ricketts uses a number of global emerging markets and Asia Pacific ex Japan funds in his portfolios, such as First State Global Emerging Markets Leaders, Aberdeen Asia Pacific Equity and Newton Asian Income, but he is particularly keen on the more nimble £525m Somerset fund.
“One we have been adding more to is Somerset Emerging Markets Dividend Growth, which fits in well with our thoughts on emerging markets,” Ricketts said.
“It’s not one of the highest yielding funds in the sector, but they are a very good team with a strong focus on companies that can deliver a growing dividend.”
The fund, headed up by FE Alpha Manager Ed Lam, was launched in March 2010.
FE Analytics data shows it is the fifth best-performing portfolio in the IMA Global Emerging Markets sector over that time with returns of 14.64 per cent.
As a point of comparison, its benchmark – the MSCI Emerging Markets index – has lost 5.46 per cent.
Performance of fund vs sector and index since Mar 2010
Source: FE Analytics
Those returns have been consistent, as the fund has beaten both the sector and the index in each calendar year since its launch.
Lam recently told FE Trustnet that he expects emerging markets to fall further in the short run and as a result has built up a 12 per cent cash weighting in order to capitalise on lower valuations.
Financials are currently Lam’s largest weighting, with the sector making up 30 per cent of his fund’s assets.
Somerset Emerging Markets Dividend Growth has a yield of 2.7 per cent and has an ongoing charges figure (OCF) of 1.33 per cent.
Trim – Jupiter Japan Income
While Jupiter Japan Income still features in Ricketts’ portfolio, he says he has been trimming his position due to the uncertainty for the Japanese market.
“We have been taking money out of it as we are giving it some as to whether we want to still be invested in Japan,” Ricketts said.
“Japanese equities had performed really well because of Abenomics last year, but what it is delivering at the moment is just a lot of volatility. I am just wondering what the returns will be if we stand by it.”
Japan was one of the real surprise markets last year. Buoyed on by positive rhetoric from the government, huge amounts of stimulus from its central bank and a weakening yen, Japanese equities led the 2013 rally.
However, while the market has waited for Abe’s “third arrow” of structural reform, returns have waned, with the TOPIX one of the worst-performing indices during the January sell-off.
Jupiter Japan Income, managed by Simon Somerville, had performed very well during the rally but has fallen further than the IMA Japan sector and the TOPIX so far in 2014.
However, our data shows that its hedged share class is still the eighth best-performing portfolio and has beaten the index over one year, despite its recent losses.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
The fund has a high weighting to industrials and exporters, which will be the prime beneficiaries if the yen continues to weaken.
Somerville also has decent exposure to financials, with Mitsubishi UFJ Financial and Sumitomo Mitsui Financial featuring in his top-10 holdings.
The fund’s hedged share class has an OCF of 1.15 per cent.
Sell – L&G US Index
Ricketts expects the US to underperform relative to emerging markets over the coming years, but he is particularly bearish on passively managed US funds.
He had used trackers quite frequently in his portfolios, but he says that because the market is normalising, active managers have a much better chance of outperforming.
“We have moved away from using US trackers and have sold out of our holding in the L&G US Index fund,” Ricketts said.
“Active funds have really struggled to outperform for quite some time now. However, the market is now favouring companies that hit their earnings targets, which will help them [active managers].”
The manager told FE Trustnet that he was considering switching out of his passive exposure because trackers can create a “self-ponzification” situation where the largest stocks in the index keep getting bid up until they reach bubble territory.
He says a similar problem is happening in the US today and so he has sold the L&G tracker and bought into the Boston Company US Opportunities fund.
The Boston fund, which is managed by Elizabeth Slover, has been a top-quartile performer in the IMA North America sector and has beaten its S&P 500 benchmark over one year, with returns of 18.78 per cent.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Slover’s largest sector weighting is in IT, with household US blue chip stocks such as Google, Microsoft, Facebook and Amazon all featuring in her list of top-10 holdings.
Its clean share class OCF is 0.82 per cent.
