Edelsten (pictured) says that investors are in danger of relaxing their investment criteria just when they need to stick to it most. Just as many investors missed the move in to Japan before its recent surge, the manager claims they are now making the opposite mistake of sitting on stocks that have made their move rather than looking for the next market to take off – and the prime candidate for this is China.
"There’s a lot of psychology in markets," he said. "People have their framework and stick to it for a while, then they find some of their favourite stocks that they sold last year have gone up more."
"They feel they have been foolish and so relax their valuation criteria, thinking they shouldn’t have been so hasty."
"So, as the stock market goes higher even really good investors can be tempted to relax their investment decisions, but in fact, as the cycle goes on you want to do the opposite and make sure you have less risk in your portfolio."
"This is not the time to get greedy, but be thankful about huge returns in equity markets," he added.
"A lot of people are getting very 'buy and hold' out there, as if it’s an investment philosophy in itself."
"If you have done well you cannot just be complacent, you have to keep checking you are not just sitting on stocks with ratings at which you wouldn’t buy today with fresh money."
"You should be getting into parts of the stock market that are less fashionable. There will be a time for China. In fact, we are just starting to put a little bit of money into China."
In recent weeks FE Trustnet has looked in depth at mining and commodities, sectors that are extremely out of favour and cheap by historic standards.
China is another investment theme to have fallen out of favour: our data shows the MSCI China index has grown just 7.47 per cent over the past three years, well behind broader emerging market indices.
Performance of indices over 3yrs
Source: FE Analytics
Edelsten says that it is a very different market to what it once was, but that it is due a recovery at some point.
"Valuations haven’t been this low for four or five years," he continued. "People who are saying it’s all over – it’s all rubbish. It isn’t the exciting market of the early 2000s, but it’s a vibrant economy."
"You need to invest in it as a developed economy, not an emerging economy. Not just exporting cheaper goods to the West, because that phase has seen its best years."
Edelsten says that at a recent meeting with a Chinese port company, he was told that imports from the West were booming while exports to the West were dwindling.
"We have tried to find ways of investing in distribution into China, like warehouse companies and global logistic companies," he said.
The manager adds that most investors are likely to miss the recovery in the country when it arrives for the same reasons they missed the Japanese rally – commercial pressures in the industry make it very hard for value investors to stick to their principles.
"The move in Japan has caught a lot of people napping. It was part of the world that was hugely out of favour nine months ago," he said.
"If people wanted to invest in Asia it was in emerging markets, not Japan, and people were worried about European banks and so on."
"Having said that, with value investing the trouble is the commercial pressures of the industry, if your valuation beliefs push you in a certain direction, your commercial pressures can be pushing you the other way."
He admits he has sold stocks that have gone on to make further gains, but says rather than trying to get back into those stocks he is looking for others that can make the same moves.
"We sold Diageo and Colgate too early last year, but because we have a global mandate we can find some other things to fill their place."
"We have more companies available on a global portfolio. If you are running a UK mandate and had sold that stock you would have had a really big problem."
Edelsten’s £33m fund was launched in July 2011. Data from FE Analytics shows it has beaten its MSCI AC World benchmark and the average global fund over this time, with returns of 28.74 per cent to the benchmark’s 24.23 per cent.
Performance of fund vs sector and benchmark since July 2011
Source: FE Analytics
Last September the manager told FE Trustnet he was bullish on the US, which benefited his fund as the S&P 500 continued its surge.
However, as valuations in America continued to rise he shifted his fund more and more into Japan, and he says that the price of US stocks is less attractive.
"We had a lot of money in the US last year. One by one as results come through, while earnings progress, a lot of shares have gone up more than the fundamentals justify," he said.
"Central banks are arranging things so people are forced to take risks. You can see money is going to keep coming in. Markets are not expensive, but there aren’t the bargains there were."
"We have always had a decent weighting in Japan but with the loosening of monetary policy – and we still think there’s a lot more atypical asset-buying planned – it’s generally where we’ve recycled our American profits."
Data from FE Analytics shows that Artemis Global Select has raised its weighting to Japan from 7.9 per cent in January to 15.7 per cent today.
The manager says that one benefit of Japan’s dubious economic history is that quality businesses get over-looked by many investors.
"They are world-leading businesses and if they had been quoted in any other market, valuations would be much less reasonable."
Shimano, the world-leading brakes and gears manufacturer, is the top holding in the fund, at 2.2 per cent.
Sumitomo Warehouses is another top-10 holding, making up 1.9 per cent of the fund.
Edelsten says that while he is starting to move into China, he thinks that the Japanese run will continue for a number of months at least.
"I hope a lot of it plays out this year, but I do not mind if it doesn’t. We have to see how earnings go; what we already know is that a lot of exporters have margins that are very low in yen, so can drive margins dramatically.”
"So a range of companies we are investing in say they will make double earnings this year."
"At the same time, if anything, earnings in the rest of the world have been dull."
"Nothing I say is predicated on 'Abenomics' working: it isn’t an economic argument, just based on the valuation of stocks."
Artemis Global Select requires a minimum initial investment of £1,000 and has ongoing charges of 1.9 per cent.