Skip to the content

Five bearish alternatives to Martin Gray

02 July 2014

The former FE Alpha Manager ran the £774m Miton Special Situations fund for more than 16 years, but recently left the firm under a cloud of uncertainty. Here we look at potential alternatives for anyone looking for something similar.

By Joshua Ausden,

Editor, FE Trustnet

Martin Gray’s exit from Miton has left a gaping hole for investors looking for exposure to a genuinely bearish fund.

ALT_TAG Gray’s high cash weighting and preference for alternatives rather than risk-assets is based around his view that the global economic recovery is based on false pretences.

He believes that high levels of government debt and long-term unemployment prove we’re still in the midst of a financial crisis, adding that high valuations and the end of quantitative easing could result in a 2008-style sell-off.

Regardless of why Gray (pictured) left the firm – Miton insists that it was purely for business reasons and had nothing to do with the significant underperformance of CF Miton Special Sits in recent years – it’s assumed that incoming manager David Jane will make significant changes to the portfolio.

For those who agree with his concerns, or want a fund in the mould of a Gray-led CF Miton Special Situations fund as an insurance policy in a balanced portfolio, here are some potential alternatives.


Iain Stewart


Stewart has long been sceptical of the growing optimism surrounding the economic recovery, though only recently has he been as active as Gray was in taking risk off the table in his £9bn Newton Real Return portfolio.

The manager thinks QE has created huge bubbles in a number of different markets, and is concerned improving GDP growth is not sustainable.

Earlier this month, he said: “The problem I have is the unintended consequences of QE, such as widespread misallocation of capital and whether these policies can be reversed. The risk is that intervention begets more intervention and so on”.

“You’ve got capital misallocation [in areas like residential real estate, EU peripheral bond yields and riskier credit] as investors are forced to chase yield and return.”

“I’m not convinced the growth coming through is sustainable, although demand has been brought forward, real disposable incomes are not increasing.”

Stewart has had sizeable exposure to risk assets for some time, which has seen him outperform Gray. He’s been more willing to cash in on the QE-led rally than his rival, and reaped the rewards to a certain extent.

Performance of funds over 5yrs


ALT_TAG

Source: FE Analytics

However, concerns over valuation have seen Stewart double his cash exposure from April to 22 per cent and he’s also sold almost entirely out of high yield bonds. The manager has also added a 25 per cent short position on the S&P 500 to offset his 57 per cent equity exposure.



Marcus Brookes and Robin McDonald

While FE Alpha Manager Marcus Brookes (pictured) and Robin McDonald are not as pessimistic as Stewart and Gray when it comes to their concerns over the global economic recovery, they are among the few that have shown a willingness to sit on the side-lines in cash and alternatives in recent months.

Performance of fund and sector over 3yrs

ALT_TAG

Source: FE Analytics

The duo has benefited from high weightings to bullish UK funds such as Fidelity Special Situations in recent years, but concerns over valuations in the bond and equity market have prompted them to up their cash exposure to 33 per cent in their flagship Schroder MM Diversity portfolio in recent months. ALT_TAG

This is even more than Gray’s cash weighting when he departed the firm [31 per cent].

The Schroder fund, which can hold as much as 60 per cent in equities, has over a quarter of its assets in alternatives such as absolute return and currency funds. Majedie Tortoise and a short sterling ETF are both top-10 holdings. Bonds have an 11 per cent weighting.

Cash is their preferred choice however, as they think every asset class is likely to get hit over the next six months or so.

“We could even be facing a rising rate environment and an end to QE in the US, in the next six months or so, if not in the next year,” Brookes said back in May.

“In any case our equity, bond and alternatives look vulnerable.”

Brookes and McDonald’s £128m Schroder MM Diversity Tactical portfolio is even more conservatively positioned, with 44 per cent in cash and 11 per cent in alternatives. The fund can hold up to 100 per cent in equities.

Cash weighting (in blue) since July 2011


ALT_TAG

Source: FE Analytics

The sand chart above shows how the Tactical fund’s sector weightings have changed since July 2011. Cash is represented by the blue section, which has increased significantly in recent month and years.



Alastair Mundy

Alastair Mundy is one of the highest rated deep value equity investors in the UK, with Investec UK Special Situations a popular choice.

However, he puts the same emphasis on valuation when running his £2.8bn Cautious Managed fund, and a lack thereof has prompted him to up his cash weighting to 20.7 per cent.

Mundy’s concerns are principally centred around valuations, but he also has a number of macro concerns that echo Gray’s. Like him, he points out that debt has simply been passed on from companies to governments, and thinks the long lasting effects of QE are still yet to be felt.

Bonds and particularly gilts make up a big portion of the Cautious Managed fund, as does gold, which the manager sees as a good hedge against inflation and deflation. Gold and gold equities currently have close to a 10 per cent weighting in Investec Cautious Managed.

This, combined with Mundy’s underweight in equities and high cash weighting, has seen the fund fall behind its sector average over one and three year periods, though its longer term record is still very strong.

Mundy’s style means that he tends to underperform towards the end of the economic cycle. However, he has a habit of outperforming in market downturns and the consequent rebound, as was the case in 2008 and 2009.

Performance of fund and sector over 10yrs

ALT_TAG

Source: FE Analytics

Mundy has recently bought back into the supermarkets, which he sees as one of the few standout sectors for value in the UK following the recent sell-off.


Sebastian Lyon

Like Gray, Sebastian Lyon has come under fire for underperformance in recent years.

He has factored in a full-scale equity market correction for some time, which saw his £2.2bn Trojan fund unusually make a loss in 2013. A high weighting to gold, cash and inflation-linked bonds all contributed to his poor run.

The fund’s record in 2014 is much better however, and Trojan is top quartile in its IMA Flexible Investment sector year-to-date.

This is indicative of Trojan’s longer-term track record: Lyon’s emphasis on downside protection sees him underperform when markets rally, but outperform when markets plummet as they did in 2008, or go sideways as they have done this year.

Cash and near cash currently has a 17 per cent weighting in Trojan. Index-linked bonds have a 27 per cent weighting, gold and gold equities have a 14 per cent weighting, while equities account for 44 per cent of assets. Lyon can hold up to 100 per cent in equities.



Steve Russell

Ruffer and Steve Russell’s base case is for high levels of inflation as a direct result of central banks’ easing measures. Gray actually feels that deflation is more likely in the shorter-term, but saw inflation as a likely scenario in the longer-term.

Inflation-linked bonds and gold are high conviction bets for Russell, accounting for 40 per cent of his CF Ruffer Total Return fund combined. Cash has a 6 per cent weighting.

Though Russell and Gray do differ in some of their views, both share a very strong track record in falling markets. They are not afraid to go off the beaten track and use more esoteric techniques to grind out a positive return such as currencies and long/short strategies.

Russell was one of the best performing managers in the disastrous year of 2008, making more than 20 per cent compared to the FTSE’s 30 per cent decline.

CF Miton Special Sits wasn’t far behind, making 7.26 per cent. Both also made money in 2011, though unlike Gray, Russell has managed to make decent returns in the up years of 2012 and 2013.

Performance of funds over 7yrs

ALT_TAG

Source: FE Analytics

Russell’s bullish stance on Japan has helped, and is what separates him from his peers mentioned here. Russell thinks the government’s inflationary policies are set to benefit the equity market considerably, and points to cheap valuations as a reason to be even more optimistic.

Japanese equities have a 17 per cent weighting in the fund.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.