As the article explains, Dye became a household name in the late 1990s due to his ultra-bearish stance on equity markets. His views were almost as strong as the recent concerns of FE Alpha Manager Martin Gray, who recently stepped down as manager of the CF Miton Special Situations Portfolio following a period of significant underperformance.
Dye argued that equity markets were too expensive as early as 1995, which saw him vastly underperform the FTSE All Share for five years. He had some success during the Asia crisis, but all in all it was a miserable time for the manager.
Again, parallels can be drawn with Gray – his Miton fund has returned a meagre 16.53 per cent over a five year period, compared to 91.4 per cent from the FTSE All Share. The manager had some success in 2011 in the depths of the eurozone crisis, but his belief that equity markets are up to 50 per cent overvalued has been heavily punished overall.
Performance of fund and index over 5yrs
Source: FE Analytics
Dye’s stubborn stance saw his fund fall to the bottom of the league tables in 1999, and in the February that followed he was sacked – just weeks after the FTSE approached the 7,000 barrier for the first time.
Days after his dismissal, his prophesy finally came true. Markets crashed and kept falling further for three more years, resulting in more than 50 per cent being wiped off the value of global stock markets. Of course, it was too late for Dye, who at the time wasn’t running any portfolios. Earlier this week, Gray (pictured) stepped down as manager of the CF Miton Special Sits fund, and also from the board of directors at the group. It is not entirely clear yet whether the decision was in any way linked to the manager’s poor performance in recent years, but most industry professionals suspect it was a contributing factor.
Performance of indices 1997 – 2004
Source: FE Analytics
I’m sure you can see where I’m going with this. Investor confidence and equity market valuations are at historic highs, interest rates are on the verge of being raised, and no matter what politicians tell us, the huge piles of government debt prove that the financial crisis is by no means over – especially as the long-lasting effects of quantitative easing are yet to be felt.
News of Gray’s departure prompted Hargreaves Lansdown’s Mark Dampier, who himself suspects that markets could have a wobble in the foreseeable future, to say: “I hope this isn’t a Tony Dye moment”.
Daniel Lockyer, manager of the PFS Hawksmoor Vanbrugh fund, added: “The VIX [the standard measure of volatility] is at all-time lows, and there’s the worry that people getting sacked or changing their views is a precursor to something dramatic.”
The parallels between Gray and Dye are unsettling – even the closing line of The Independent article has a sense of foreboding irony about it.
Towards the end of 2002, Dye predicted an imminent housing crash in the UK, predicting that at least 30 per cent would be wiped off the value of the average residential property.
“He may yet be proved right on that one too,” said author James Daley.
The article was written on 17 March 2008. In the 12 months that followed, the index fell just under 20 per cent, and is still down 8 per cent to this day.
Performance of index since 2007
Source: FE Analytics
Whether equity markets will indeed fall at this point is anyone’s guess, and of course Gray’s departure will have absolutely no bearing on the outcome.
What I think is more of a problem, however, is the fact that investors have lost access to a manager who isn’t afraid to go against the grain, and who more often than not has been proven right in doing so.
Many investors and industry professionals have spoken out in opposition of Gray, but let’s not forget how well he protected investors’ capital during the dotcom and 2008 crashes. FE data shows that his fund is the best performing fund in the IMA Flexible Investment sector since its launch in 1997, and one of the least volatile as well. It’s also ahead of the FTSE All Share over the period.
Performance of fund, sector and index since launch
Source: FE Analytics
The poor performance of Gray over the past five years is hard to justify, especially as his fund has actually lost money over a one year period. Other bearish managers such as FE Alpha Manager Steve Russell and Newton’s Iain Stewart have managed to make money even though they believe market optimism is misplaced.
“I think the problem with Martin is that a lot of his views became out of date,” said Lockyer, a former colleague of Gray.
“Fears of a breakup in the eurozone have now ended, and though valuations are very expensive there are other ways of protecting against the downside than holding 40 per cent cash.”
I think Lockyer makes a very good point, but genuine bearish managers are notable by their absence at the moment, and now another has fallen by the wayside.
Incoming manager David Jane, a former head of equities at M&G, has a very strong reputation, but he is expected to run Miton Special Sits like a traditional multi-asset portfolio. While he has recently become more bearish, he is less top down in his views than Gray, and less susceptible to making big macro calls. You can read about his current view on markets here.
Holding exclusively Miton has been very painful of late, but many supporters of Gray viewed him as an insurance policy – a manager who would help soften the blow in a worst case scenario. In many ways it was a good thing if the Miton fund was performing badly as it would suggest riskier assets that made up the bulk of the portfolio were performing better.
Trojan, Ruffer and a range of absolute return funds are still options for those looking to add a layer of protection from macro disaster, but having one less to choose from is a negative.
Let’s hope other managers with equally strong views aren’t put off by the fate of both Dye and now Gray.
