John Ricciardi has raised the equity exposure in his Deuterium Global Dynamic fund up towards 90% of assets, saying improved economic indicators combined with low valuations mean “you’ve got to go long risk”.
Ricciardi relies on a proprietary system that uses “about 100,000” data points to model economic forecasts. It then combines these forecasts with separate models for central bank policy, market valuations and price trends to predict the direction of asset classes.
Early last year, the model told Ricciardi to cut the fund’s equity weighting to the minimum allowed (20%), reduce duration by as much as possible in the fixed income portion and maximise exposure to the dollar.
This allowed it to return 5.3% in 2022, compared with losses of 8.9% from its IA Flexible Investment sector and 5.7% from its benchmark, split 50:50 between the Bloomberg US Aggregate and FTSE World Local indices.
Performance of fund vs sector and benchmark in 2022
Source: FE Analytics
However, now the model is telling him to buy equities.
“Instead of going down, world factory orders are actually bouncing back up again. We look at production, orders and exports in 30 countries and while it was all grey [negative] in the model at the end of last year, now only half of it is,” he said.
A note from Deuterium said: “Projections for production, factory orders and durable goods suggest a shift to flattening from contraction in a global recovery.
“Higher real wages, improving trade and better financial conditions will lessen the headwinds to worldwide demand while central banks’ priorities will be less to raise rates and more to restore economic growth.”
Ricciardi added: “In terms of valuations, the model shows everything is gold [positive], while inflation is coming down as well.
“We are bullish on almost everything. There are a couple of bears, such as the Japanese bond market and the dollar, but the cycles are bottoming so you’ve got to go long risk.”
After reducing exposure to cyclical sectors such as technology and discretionary goods back in October, he raised them again in January, “figuring what’s done the worst always does the best in the rebound”.
Deuterium Global Dynamic’s largest asset weightings are currently to US equities at 23.5%, followed by European equities at 22% and Japanese equities at 16.2%.
Bonds make up less than 6% of the portfolio, although Ricciardi isn’t necessarily negative on the asset class.
“Investors may do well to hold modest allocations in major market sovereign bonds in Q2 2023, as most bond markets look to be fairly valued,” said a note from Deuterium, with the manager adding: “We don't mind bonds. Bonds are fine. It's just that they're not undervalued and you won't make anywhere near the money you'll make with 20 to 30% undervaluations in non-US equity markets.”
However, while Ricciardi said he is bullish, he is not calling a long-term bull market. His model only works six to 12 weeks ahead, and beyond that its accuracy begins to wane.
The manager said that investors should realise that while we are now past the Covid shock, “it took the entire business cycle off the table” and US production is roughly where it was four years ago.
“If we were to go back to standard growth rates, that would be bullish for stocks in general rather than bearish,” he added. “But who knows? I'm only good for a quarter.”
Data from FE Analytics shows Deuterium Global Dynamic is a top-quartile performer in the IA Flexible Investment sector over one, three, five and 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
It is up 117% over the past decade, compared with gains of 70.9% from its average peer and 130.3% from its benchmark.