Manager Martin Gray (pictured), had come under increasing pressure for his fund’s returns over recent years despite having considerably outperformed his peers over the long term. The manager told FE Trustnet on numerous occasions that the current market, due to mass central bank intervention and over-optimism within the investor community, had become increasingly dangerous and he was therefore going to keep a very defensive portfolio.
However Gee, who runs Phillippa Gee Wealth Management, welcomes the news and says the manager’s period of performance in recent years went on too long and showed a lack of flexibility.
“He has always been a defensive manager, but I think his recent performance has gone way beyond what investors feel is acceptable,” Gee said. “I welcome the news; I just wish it had happened a few years ago.”
Miton Group released a statement this morning telling its investors that, after “cordial discussions”, Gray has resigned as a member of the board of directors and has stepped down as manager of the CF Miton Special Situations Portfolio, CF Miton Strategic Portfolio, CF Miton Total Return fund and the Miton Global Diversified Income fund.
In the same statement, the group also notified investors that they had successfully acquired Darwin Investment Management and that David Jane, who currently manages the PFS Darwin Multi Asset fund, would take over Gray’s four portfolios.
“I think it is a good move for David Jane and it is a good move for Miton,” Gee said. “It’s just a shame that it didn’t happen earlier because it is almost too late.”
“We had supported the fund [CF Miton Special Situations] and have since moved quite a lot of money out of it.”
While Gee says that Gray has been fully within his rights to be bearish on the outlook on financial markets, she says that it is no excuse for not being able to deliver a return greater than cash over recent years.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, has a more sympathetic view on Gray’s recent performance but agrees that it has been disappointing.
CF Miton Special Sitautions had been on Morgan’s buy-list as he viewed it as a portfolio that can defend investors when everything else falls. However, as of this morning, it has been removed.
“The disappointing thing for us is that he managed to lose value in a positive market. I think investors can tolerate very small returns, but just as long as they are positive. However, this year he has lost money when everything else has gone up,” Morgan explained.
Nevertheless, Morgan says he sympathises with Gray’s situation as his bearish positioning might just be a few years too early.
However, Morgan admits that Gray has been slighty too “dogmatic” in his views recently and says that the manager should have been able to deliver some sort of positive return. In particular, Morgan points to Gray’s various S&P 500 short positions as a very costly mistake.
“It just shows how difficult it is to get macroeconomic calls right,” Morgan said.
“There are plenty of examples of managers making the right call, but not making any money from it. Momentum has clearly been with the market, but you could accuse Martin of being slightly too dogmatic. But then, I want a manager to stick to what he believes in.”
“He has said all along that QE is this huge financial experiment, that it has just inflated asset prices and that it will go horribly, horribly wrong. So far, however, QE has gone very, very well as anyone who has bought risk assets has been rewarded.”
“Will it create problems in the future; maybe? But that could be in one year, five years or 10 years. I do sympathise with Martin, but maybe he could have been a little more flexible.”
Gray is best known for running the £741.8m CF Miton Special Situations fund, which he launched in December 1997.
According to FE Analytics, it has been the best performing portfolio in the IMA Flexible Investment Sector over that time with returns of 289.51 per cent, beating the sector average by more than 160 percentage points. As the graph below shows, the fund has also been considerably less volatile.
Performance of fund versus sector since December 1997
Source: FE Analytics
During his first decade as manager, CF Miton Special Situations only underperformed the sector in one calendar year; which was in 2006. The fund is also renowned for delivering a positive return of 7.26 per cent in the crash year of 2008, while the sector lost more than 25 per cent.
However, the funds relative performance since the crash has been markedly different.
Except for the falling market of 2011 – when the fund was a top decile performer with returns of 1.79 per cent – CF Miton Special Situations has had bottom quartile returns in each calendar year since 2008.
The fund lost money in 2012, returned just 3.95 per cent in the bull market of 2013 and is currently down 2.9 per cent in 2014.
It means that over the last two years, the fund has been the third worst performing fund in the sector with losses of 0.2 per cent. As a point of comparison, the Bank of England Base Rate has returned 1 per cent over that time.
Performance of fund versus sector and index over 2yrs
Source: FE Analytics
The major reasons for that underperformance were due to Gray’s positioning. He had warned that there was no value left in the current market and was therefore considerably underweight both equities and bonds. Instead, the manager held close to 30 per cent of the portfolio in cash.
The fund currently sits on the FE Select 100 and while Amandine Thierree, analyst at FE Research, rates Gray as manager, she warned investors earlier this month about his current positioning.
“The portfolio has remained very defensively positioned for some time now and this has caused it to miss out on recent market rallies. Whilst this defensive strategy is valid, questions remain regarding whether it has to be so extreme,” Thierree said.
“We have therefore placed this fund on hold whilst we review its place on the Select 100.”
While it will also include capital losses, our data shows that some investors had already began to lose patience with Gray’s performance as its AUM has shrunk from £888.3m this time last year to its current figure of £741.8m.
On the positive side, Morgan rates Gray’s successor David Jane.
“It’s a shame because Martin is quite bearish and it’s nice to have his voice in the current market,” Morgan said.
“However, his replacement, David Jane(pictured), is a really good manager and we had looked at using his Darwin fund in the past. He has a fantastic history and so, first and foremost, he is a really good replacement and it is a really good acquisition for Miton.” “Martin is going to be a difficult act to follow, but out of anyone, I think Jane is the best possible pick.”
Jane, who was formerly head of equities at M&G, launched his PFS Darwin Multi Asset fund in June 2011. Our data shows that over that time it has returned 16.2 per cent over that time, which means it has slightly underperformed against the IMA Mixed Investment 20%-60% sector over that time.
Performance of fund versus sector since June 2011
Source: FE Analytics
Despite the fund’s relative underperformance, Morgan says he will be talking to Jane and his team over the coming weeks and could well put the CF Miton Special Situations back onto his buy-list.
Gee says she could well do the same. She also welcomes the news that Jane will stop using collective investment vehicles within the fund in the future and will instead opt for direct equity exposure like he does in his PFS Darwin fund as it will lower charges.
“Being one of the worst performers and having one of the highest charges isn’t a good combination,” she said.
CF Miton Special Situations’ clean share class currently has an ongoing charges figure (OCF) of 1.13 per cent.