The duo, who head up four portfolios including CF Miton Special Situations and CF Miton Total Return, believe talk of cheap valuations and global economic recovery is misguided, given unresolved issues in the eurozone and the US. In a recent interview with FE Trustnet, Sullivan said he and Gray hold up to 35 per cent in cash across their portfolios because there are so few attractive opportunities on offer in the market.
Here, he highlights some of the more contrarian funds he currently sees value in:
Bluecrest Allblue IT
"This is one of the largest London-listed 'trusts of hedge funds', which invests in a diversified portfolio of six house funds," explained Sullivan, who holds the portfolio in CF Miton Special Sits.
"The trust, which has an absolute return mind-set, has a stellar performance record, most noticeably the NAV performance through the 2008 crisis. It continually shows a lack of correlation to broader equity markets, which is an appealing characteristic for us."
Performance of trust vs indices over 5yrs
Source: FE Analytics
"Perhaps due to this lack of correlation in a risk-on environment, the discount has drifted towards 6 per cent. This is the cheapest it has been for some time, offering an exciting opportunity to add to our current exposure."
The Bluecrest Allblue IT is by far the best-performing trust in its IT Hedge Funds sector over five years, with returns of 86.52 per cent.
It holds six hedge funds – Bluecrest Capital International, Multi Strategy, Emerging Markets, Alignment, Mercantile and Bluematrix – with a weighting ranging from between 35 and 5 per cent.
The trust has an ongoing charges figure of just 0.08 per cent, according to the AIC.
The NB Distressed Debt IT
Sullivan and Gray also hold the NB Distressed Debt Investment trust in Special Sits – a £305m closed-ended fund that sits in the IT Debt sector.
Sullivan says the team does not hold conventional debt, because of poor valuations, but points to this as an attractive contrarian play.
"It invests predominantly in US distressed asset-backed senior credit," said Sullivan. "The managers have been patiently investing the portfolio, benefitting from the banks unloading lines of credit they previously were willing to hold on their balance sheets."
"Although returns have been quite flat since its launch in 2010, the portfolio is beginning to show the fruits of the labour as realisations come through. From this point I expect the performance to pick up from what we’ve seen in the previous two years."
Performance of trust since launch
Source: FE Analytics
"We don’t own conventional credit, but this trust offers an alternative play on the market – albeit with a different risk profile."
"Distressed debt is baked in to the underlying lines of credit within the portfolio, so this trust could be considered somewhat immune to wider economic concerns, or normalisation of interest rates. It is effectively a portfolio of special situations."
The trust is currently trading on a discount of 2.6 per cent and has an ongoing charges figure of 1.47 per cent.
Juridica IT
"This is a true alternative investment, which we hold in the Total Return fund," said Sullivan.
"Litigation funding has become more commonplace, with increasing numbers of investors pursuing avenues of alternative and uncorrelated investing. Juridica is one of only a small handful of ways investors can access this area of expertise."
"Juridica invests in a diversified portfolio of litigation claims, either directly taking a stake in the claim or via loans to law firms to finance claims."
"Its mature portfolio is now beginning to bear fruit as litigation investments reaching maturity generate strong returns – the chairman recently commented 'the majority of the trust’s investments are reaching their concluding stage', with significant activity expected over the next 18 months."
According to FE data, the £122m trust – the sole constituent of the IT Litigation sector – has returned 7.95 per cent since its launch in December 2007.
Until recently it had been losing money since launch, but has seen a significant uptick in the last three months or so.
Performance of trust since launch
Source: FE Analytics
Sullivan points out the trust often pays out special dividends and so may be attractive for income investors, but acknowledges income to be "lumpy".
According to FE Analytics, its one-year historic yield is currently 14.33 per cent.
The Juridica IT is currently trading on a discount of 22 per cent and has an ongoing charges figure of 2.88 per cent, making it one of the most expensive investment trusts in the UK market.