The fund has moved from being in the top decile in 2009 to currently being in the bottom quartile, Collings admitted, and has returned 40.6% since its launch in February 2009, compared to 76.3% from the IMA Global Emerging Markets Sector (as at 30 April).
He said this is due to the highly unusual decoupling of US-proxy emerging markets and China-proxy emerging markets, the latter of which he is fully invested in.
"If you look at equity markets, the US has done particularly well and it has taken Mexico and the Asean countries [southeast Asian nations such as the Philipines, Thailand and Malaysia] with it. On the opposite side, China has de-rated significantly and taken China proxies such as Brazil, Korea and most commodities with it."
US proxies vs China proxies
Collings splits emerging markets into what he terms pro-US, anti-China and anti-risk on one side and pro-China, anti-US and pro-risk on the other and he has his whole fund invested in only four countries: China, Brazil, Russia and Korea.
This means he has a significant overweight in each of these markets, with Brazil in particular a high conviction bet, with almost 11% more than the benchmark.
Ordinarily all emerging and developed equity markets are highly correlated, he explained, but the final quarter of 2008 was an exception to this rule when the US and its proxies and China and its proxies diverged. He said the past couple of quarters have shown a similar trend.
"The S&P 500 has outperformed China and in the last six months the US has done very well relative to China. If you were not in Asean you did very badly, conversely if you were in financials or anything non-consumer and anything in China, Russia or Brazil you were dead. Yet the S&P 500 was still going up which is highly unusual."
He said this decoupled state is not sustainable because capital flows are international and trade is global, so he is using it as an opportunity to build on positions already held as valuations are depressed.
Costly 14 months
"The last year to 14 months has cost us, but we are sticking to our guns. If you hate our view you would say ‘Ha ha, serves you right, we still hate you’, or if you like our view then you will say ‘Yes, that still makes sense’ and you would be buying us at the bottom."
Fortunately for Collings approximately 80% of his fund is held by only 20 institutions. "They are long term investors. They want big chunks of performance and are happy to tolerate long periods of underperformance. They do not want to see a fund manager with a view building positions and then capitulating their ideas so that when markets come round they do not get as much performance," he said.
Collings does not expect to get a "nice v-shaped" recovery like we saw in 2009 when his fund outperformed by 29%, but he thinks the reversal will come and the catalyst will be political.
The biggest worry for the US will be the election and its result. After this, whoever is President will be forced to face up to the country’s fiscal problems, sluggish growth and high unemployment.
So far the US has emerged from the recession relatively unscathed because investors have been more focused on the eurozone situation and worried about prospects of a Chinese hard landing, Collings said.
But as investors realise the eurozone is salvageable and the US is worse off than they thought they will look east once again.