Ricketts, who heads up the fund of funds range at Margetts, is avoiding tracker funds for 2014 as he believes the market will soon realise that certain areas are overvalued. “For next year, we are backing active managers,” he said. “The US market, for instance, has done very well but I am concerned that a few bubbles are emerging.”
“I am not saying we are in a scenario like 1999, but just look at Twitter’s share price. My concern is that there are companies out there that have high valuations but don’t actually make any money.”
“Some stocks are going to be found out and I would expect hedge funds to come in next year and short out the value,” he said.
Ricketts is particularly concerned about the small and mid cap sectors of the market.
According to FE Analytics, over one year the FTSE Small Cap and the FTSE 250 have returned 32.27 per cent and 28.38 per cent respectively while the FTSE 100 has returned 13.41 per cent.
Performance of indices over 1yr
Source: FE Analytics
Ricketts expects that performance gap to narrow markedly over the coming year.
“Across the markets, it will be more difficult to add value,” Ricketts said. “Riskier assets have performed really well recently, however I think the rally in the likes of small caps and cyclicals will definitely start to unwind.”
“I would expect that small and mid caps will continue doing well during the first part of the year, but as the volatility from tapering comes through, that’s when large caps will outperform again.”
“Just look at the UK funds with mid and small cap exposure, they have performed well but when a fund is up 40 to 50 per cent in a year, that makes me nervous as you know those returns aren’t sustainable.”
A number of leading fund managers, including Investec’s Alastair Mundy, have voiced concerns that there hasn’t been enough earnings growth to justify the current high ratings of certain parts of the equity market.
The likes of the S&P 500, the FTSE All Share and the MSCI Europe ex UK indices have all returned in excess of 20 per cent this year, though the market has since pulled back due to concerns over tapering. Nevertheless, P/E ratios have been rising steadily during the year.
Performance of indices over 1yr
Source: FE Analytics
Ricketts is also concerned there has not yet been enough earnings growth and says there will be a correction before long.
“In the US, P/E ratios have actually improved. However, that has been because companies have been refinancing and buying back shares, therefore concentrating their earnings into a narrower equity base,” he added.
Ricketts says this is not something to be overly concerned about on a long-term basis. He says theses bubbles have been inflated by the Fed’s quantitative easing programme and that as it begins to taper, the air will be let out.
“It is no surprise it has happened, with the Fed chucking in $85bn a month into the market and expanding their balance sheet to £4trn. When monetary policy is loose, you will always get bubbles. That’s part of the reason behind it.”
“Next year, however, some of those bubbles will begin to unwind. Not all companies will be affected and across all the developed markets, good stockpickers will be able to perform well, while bad stockpickers will be stretchered out,” Ricketts added.
As a result, Ricketts expects returns from general equity markets to be far more muted in 2014 than they have been this year.
“People have been very excited about 20 to 30 per cent returns from equities, but I think there will be far more volatility next year and to be honest I’d be happy with seeing low double-digit returns in 2014,” Ricketts said.
The manager runs numerous funds of funds at Margetts and has exposure to most asset classes and regions across his range of portfolio.
One of his best performers has been the £83.1m Margetts Venture Strategy fund. Our data shows that with returns of 159.39 per cent, it is the second-best performing portfolio in the IMA Flexible Investment sector over 10 years.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund has a large allocation to emerging market equities, which has meant it has struggled relative to its peers in recent years. However, Ricketts is still very bullish on the developing world and has been upping his exposure.
“We do like Asia and the emerging markets,” he said.
“They have been very out of favour and earnings have disappointed; however, the long-term story is still intact and now is a good entry point. In our opinion, Asia and emerging markets will start to outperform the developed markets next year,” Ricketts added.
His fund is certainly positioned for a turnaround in emerging markets, with First State Global Emerging Markets Leaders, Aberdeen Emerging Markets, Aberdeen Asia Pacific, UBS Emerging Markets Equity Income and Schroder Asian Income all featuring in its top-10.
Altogether, emerging markets and Asia Pacific ex Japan equities make up 61 per cent of Ricketts’ fund.
Margetts Venture Strategy has an ongoing charges figure (OCF) of 2.54 per cent and requires a minimum investment of £1,000.
