FE outflows data shows that the Troy and Miton vehicles suffered outflows of £135m and £44m respectively between the end of December 2013 and the end of March 2014. Lyon’s Trojan fund is now £2.2bn in size falling from a peak of £2.65bn back in March last year, while assets in Gray’s Miton fund have fallen from a high of £883m to £770m at time of writing.
Redemptions have followed a sustained period of relative underperformance from both funds, which started at the beginning of 2012. Until now investors have been very patient, keeping faith in managers that protected them so effectively from the down years of 2011 and 2008 in particular.
However, the increasing optimism sweeping through markets has been in stark contrast to the managers’ ultra-bearish outlook. Both have been punished for holding high levels of cash and inflation linked bonds, with the Trojan fund’s gold content also hurting returns.
Lyon and Gray’s stellar record in tough times ensures they remain well ahead of their IMA Flexible Investment sector over the long-term, but they are now bottom quartile over a cumulative one, three and five year period. Most worryingly, both funds have lost money over the past 12 months.
Source: FE Analytics
Both managers have less than 40 per cent of their portfolio in equities, even though many of their rivals consistently have more than a 90 per cent weighting. However, both want the flexibility to max out their exposure when – or if – risk assets become more attractive.
FE Alpha Manager Gray (pictured) acknowledges that performance hasn’t been as good as he’d have liked in recent years, but insists he is protecting investors from downside risks for the right reasons.
Though GDP growth has undoubtedly improved, he argues that the rally is a result of central banks manipulating the system, by inflating the economy with monetary easing, and encouraging investors and companies to borrow at record low interest rates.
“It just doesn’t feel real to me. Central banks have shown in the past that they can’t manipulate markets forever,” he said.
“I never like to see negative returns, but I’ve got to be realistic. I think now is the time to be protecting, but this isn’t an absolute return fund.”
Gray will talk in greater detail about his worries over economic and market stability in an upcoming FE Trustnet article.
CF Miton Special Situations’ 10.9 per cent weighting to Japanese equities, which has sold off around 10 per cent so far this year, has contributed to his poor one year numbers, as has his high level of exposure to non-sterling assets – thanks to the relative strength of sterling.
Gray adds that the vast majority of investors and advisers he speaks to on a weekly basis understand why he hasn’t taken part in the rally, and suspects a lot of the money that has flown out of the fund has been put in over the past three years or so.
“I can understand the reasons why advisers may be looking elsewhere, but I must say most of those we have spoken to say ‘don’t worry Martin, we understand why you are doing this and we want some protection in our portfolios,’” he said.
“We took in a lot of assets in 2011 when our numbers were looking very good. I’d imagine a lot of that is gone now.”
At the end of 2011, both the Trojan and CF Miton Special Situations looked very good versus their IMA Flexible Investment sector over the short, medium and long-term.
Performance of fund, sector and index 2007-2011
Source: FE Analytics
“On a three to five year view, I think investors should be looking back to funds such as mine, Ruffer and Trojan. Yes we’ve been too early, but the reality is that investors get these things the wrong way round,” said Gray.
“There could be a time when we look very good again, and that might be the wrong time to buy us. Over the long-term though, I think most of our investors know why they hold us.”
CF Ruffer Total Return is another fund with an emphasis on downside protection. It has also underperformed versus its peer group over a one, three and five year period, though the £2.8bn portfolio seen very little in the way of outflows over the past year.
Paul Davis of Clear Financial Advice agrees with Gray – a manager that he holds alongside Lyon across his clients’ portfolios. He views both Miton and Troy funds as insurance policies, and questions whether investors are selling out of them for the right reasons.
“I keep reading articles lambasting these managers for their performance over the last 12 months. If you bought into these funds to chase returns, I would question whether you’ve done your due diligence when buying them,” he said.
Davis says that he’s willing to stomach the slight losses both funds have sustained over the past year because they are part of a diversified portfolio.
“We’ve spoken to a lot of people recently who are saying the same thing – they are taking risk off the table,” he said. “Most recently Marcus Brookes [at Schroders] has been going into cash.”
“We believe there is going to be a correction at some point, and we think these are they guys to help protect us from that. Jumping from these funds now into funds of fashion at the top of the sector is the worst thing to be doing – if the market falls, they will fall with it.”
A spokesperson for Troy says the group doesn't comment on investment outflows, but does point out Trojan is closed to new money - though does remain available on certain platforms.
"As we said in our recent investment report, if current positive market sentiment continues, equity markets are at risk of entering another bubble. Our conservatism puts us in good stead for when a sellers’ market becomes a buyers’ market,” Troy added.