Investors’ heightened appetite for risk is “almost certainly sowing the seeds of the next market downturn”, according to Artemis’s William Littlewood (pictured). 
The manager, who heads up the £817m Artemis Strategic Assets fund, warned in his latest monthly commentary that the next recession is unlikely to be too far away, given the current market cycle is long in the tooth.
As such, his portfolio is cautiously positioned, with a 28.9 per cent gross short position in equities and a 9.2 per cent weighting in gold.
“Economic growth splutters along. Although there is little sign of an imminent recession, it has been eight years since the last one. Before then, gaps between recessions were seven years and eight years,” Littlewood said.
“Despite central bankers' efforts to ward off recessions, these are natural and probably necessary characteristics of capitalist economies. The next recession is probably not too far away.”
Not only this, the manager pointed out that the last bear market was also seven or eight years ago, which he deems to be an unusually long period of time between downturns.
Performance of indices over eight years
Source: FE Analytics
He said this has been the result of ultra-loose monetary policy – such as negative interest rates and government bond-buying programmes – which have made investors complacent.
“Measures of volatility, such as the VIX, have been drifting relentlessly down, reaching 11-year lows,” Littlewood warned. “Bond yields are extremely low versus history. Japanese 10-year bond yields finished the month with a zero yield, despite being backed by a government with huge levels of debt and a chronic deficit.
“These low yields cause people to take on too much risk, almost certainly sowing the seeds of the next market and economic downturn.”
When it comes to his portfolio’s equity exposure, the manager’s gross long position within the fund stands at 65.8 per cent, with its net position within the fund at 37 per cent.
Given his macroeconomic views, he said his equity holdings have become increasingly concentrated. For instance, his top 10 largest equity weightings account for 45 per cent of all his positions in the asset class and 30 per cent of the overall fund. Examples of his largest long positions include retirement product specialist Just Group, German internet company Rocket Internet and BP.
“As I have observed before, the equity portfolio increasingly resembles a special situations fund,” Littlewood said. “Many of our bigger positions are for various reasons unloved by the stock market.
“[Some] 65 per cent of our equities are in the UK and many of these are domestically-focused businesses.”
While the manager pointed out that he is not especially bullish on the UK economy, he believes Brexit-related uncertainty has led to the blanket selling of stocks and overly pessimistic views regarding the country’s welfare.
“It is unclear to me that the UK is obviously better-off as part of the European bloc. We might be, we might not. Time will tell,” he reasoned.
“From an economic point of view, the arguments both for and against remaining in Europe both have validity.
“However, this pessimism has caused many UK domestic companies to be lowly rated, and explains our overweight positions.”
Elsewhere, Littlewood remains bearish on fixed income and holds 98.4 per cent of his bond exposure in short positions. While this is very close to his maximum allowed limit of 100 per cent, he has slightly reduced his Italian bond shorts over the last month.
“Bonds continue to make no sense to us,” he continued. “At the end of August there were $7.6trn of government bonds which had a negative yield. In Japan the 10-year bond yield has crept back down to yielding nothing again.
“Japan has terrible demographics, a chronic budget deficit and enormous levels of debt. Its government spends more than it earns in revenue from taxation, issues bonds to pay for this excess – and then prints money to buy the bonds back.
He added: “This form of explicit debt monetisation has always ended in failure. I am surprised this experiment has not failed already, but I am in little doubt that it will fail, probably with devastating consequences.”
As such, investors will be unsurprised to hear that 22.1 per cent of Littlewood’s currency exposure is a short on the Japanese yen. He is also 13.5 per cent short sterling, has a 10.9 per cent short on the euro and is 9.2 per cent short the Canadian dollar.
While his currency position has remained largely unchanged over the last month, he has closed his 0.6 per cent short position in the South Korean won.
“We opened this position back in April when tension between North Korea and America began to arise,” the manager explained.
“A war between these countries, or an eventual reunion of North and South Korea, would cause the won to depreciate sharply. However, I do not anticipate such outcomes; and given that the won had been weak, we have taken profits here.”
Long currency positions in the portfolio currently include the Swedish krona at 26.8 per cent, the Singapore dollar at 15 per cent and the US dollar at 12.1 per cent.
Elsewhere, Littlewood holds 15.8 per cent in commodities, 9.2 per cent of which is in gold.
Over five years, Artemis Strategic Assets has underperformed its FTSE All Share benchmark by 21.17 percentage points with a total return of 39.68 per cent.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
That said, several investment professionals continue to back the fund, with Schroders’ Marcus Brookes attributing his underperformance to his negative views on the Japanese bond market.
The fund has a clean ongoing charges figure of 0.86 per cent.