McDonald, who heads up the £631m portfolio with co-manager Marcus Brookes, does not expect the likes of China, India and Brazil to continue their strong start to 2011.
"As of last week we sold all of our exposure to emerging markets in the Diversity fund," he said. "We held a hedge fund called Nevsky Eastern European, which has had an excellent year so far, but decided to cut it out of the portfolio."
"Emerging markets over the course of the last 10 years have benefitted massively from a US dollar that has been perennially weak and a central bank that has sought to debase it quite consistently."
"However, for this year at least we expect the US dollar to be quite strong, which will have implications across many portfolios. With regard to emerging markets, we believe this factor will cause them to significantly underperform developed markets."
In spite of a poor 2008 and 2011, IMA Global Emerging Markets has been the best-performing sector of the last decade, returning more than 237.13 per cent. By contrast, the hugely popular IMA UK Equity Income and IMA UK All Companies sectors are up 68.82 and 62.29 per cent respectively over this period.
Performance of sectors over 10-yrs
Source: FE Analytics
McDonald has also cut his exposure to commodities funds in anticipation of a stronger US dollar. The likes of BlackRock Gold & General and JPM Natural Resources have also had an excellent decade, with returns of 472.72 and 561.46 per cent respectively.
"As the US dollar gets stronger, other nations’ goods and commodities become more competitively priced, which has obvious implications on the markets," McDonald added.
While a stronger dollar has made McDonald less bullish on emerging markets, the manager points to Japan as an area that could potentially benefit from currency shifts.
"This year we think Japan represents a significant upside opportunity, largely because we believe the central bank will more aggressively weaken the currency," he explained.
"If this does happen, we’d get the upside offered by the Japanese equity market and, since we hedge the currency into dollars, we wouldn’t suffer the currency depreciation that comes with that."
The manager holds Stephen Harker’s GLG Japan Core Alpha portfolio in his top-10.