Sullivan and Gray previously ran the CF Miton Special Situations and CF Miton Strategic portfolios, but left the firm earlier this year. Sullivan announced he was launching Coram earlier this autumn, and Gray is set to join him at the beginning of next year.
The duo prioritises capital protection above all else, and delivered positive returns in both 2008 and 2011 when equity markets corrected. Their bearish stance on the economic recovery led to a challenging period of performance between 2012 and 2014, but over the long term the funds’ risk-adjusted returns are strong on both a relative and absolute basis. Sullivan (pictured) says he and Gray will run money in a very similar way as before, though there are plans to launch some additional portfolios.
“We’ll be looking to launch a range of global multi-asset funds, made up predominantly of other collectives – not only open-ended funds but investment trusts, ETFs and so on,” he said.
“This is what we did and do best. There’s no reason to change anything. Ultimately we’ll be looking at two or three funds covering the risk spectrum – initially a cautious and balanced fund and then potentially one that’s more growth focused.”
“We’re looking to grow as a business, but we’re not rushing into anything. We’d love to launch an investment trust one day, but not necessarily in year one.”
Sullivan says the cautious fund is likely to sit in the IMA Mixed Investment 20-60% sector and the balanced fund in the 40-85% sector.
“I think putting them in sectors like this is very useful – it gives the client a good starting point and helps the end investor understand the likely asset allocation bands. Having said that we wouldn’t allow ourselves to be held ransom to the sectors – we would leave if we wanted to,” he added.
The growth-focused fund, which Sullivan says is likely to have more in risk assets, will sit in the IMA Flexible Investment sector. This, the manager explains, would allow it to significantly reduce its exposure to equities if the team became particularly bearish.
Sullivan hopes the funds will be launched as early as the first week of December and most probably by early 2015.
“Opportunities like this – to be a founder member of a boutique and work alongside fantastic people like Mel Kennard and Martin Gray – don’t come around very often,” he said.
“There is still a huge demand for the active management of asset allocation. As always we will be looking at real returns rather than relative returns. This may mean we miss out on the upside and we may participate on the down – however, over the long term we are confident we can deliver appealing risk-adjusted returns.”
As mentioned, both the CF Miton Special Situations Portfolio and CF Miton Strategic Portfolio have struggled in recent years. Gray and Sullivan have been sceptical of the economic recovery and developed market equity valuations for some time, which saw them badly lag their peers in 2012, 2013 and the beginning of 2014.
The funds’ longer term records are much stronger, however, with Special Sits achieving top decile performance in its IMA Flexible Investment sector over 15 years. However, it has fallen into the third quartile over 10 years and the fourth quartile over five.
Gray ran Special Sits and Strategic for the best part of two decades, with Sullivan joining the team in 2008.
Performance of funds and sector over 15yrs
Source: FE Analytics
Former head of equities at M&G David Jane has since taken over the funds. He has made significant changes since coming to the helm, adding significantly more risk back into the portfolios and switching from a fund of funds structure to a direct securities structure.
The two funds have seen combined outflows of more than £350m over the past 12 months, as a result of not only the change in manager but also the underperformance prior to Jane’s appointment.
Sullivan acknowledges that he and Gray have made some mistakes in recent years and insists that he will be doing things slightly differently with his new venture.
“One thing we need to do is increase our client understanding, by explaining how we are expressing our opinions through fund selection,” he said. “It’s not just about our outlook, but also how we are playing it and I think it’s very important to make that clear.”
“Also, in hindsight, we would have been more reactive to shorter-term, micro opportunities. Yes the economy is lacklustre, but if an investment trust is trading on a certain discount then that’s an opportunity.”
“We run the fund on a proactive basis, in that we are already looking ahead. However, we need to be a little more reactive.”
Performance of funds and sector over 5yrs
Source: FE Analytics
Sullivan expresses frustration that a number of his and Gray’s high conviction plays have finally started to bear fruit in recent months.
“Regardless of the fact that markets have bounced back, we welcome the volatility. It’s good for us because it reminds clients that not all is good in the world, and shows that there is and always will be a place for the funds we run,” he said.
“What’s been quite frustrating is that a lot of plays we were making in our old funds are now coming off. Japan has bounced and our long US dollar position versus sterling is now performing very well. To be honest, I’m delighted that some of our previous holders are now being rewarded after a couple of difficult years.”
On the whole he remains wary of the economic recovery and doesn’t believe markets fell nearly far enough in October to warrant a medium to long-term buying opportunity. He says that the potential for social and political unrest around the world is particularly worrying and makes a strong case for a layer of protection in a portfolio.
“Three years ago we said that interest rates would stay low for the next decade. Back then it sounded flippant, but here we are and rates are still at 0.5 per cent and there’s little justification that they can go any higher,” Sullivan said.
“Even with the unprecedented stimulus, we have sluggish growth and are in a disinflationary environment. Japan is a lesson to us all, but what it does have is social cohesion. We don’t have that in the west – we have a very fragmented economy.”
“This is developing in Europe and is already very much the case in the US. Only the very rich have benefitted from asset price inflation, but there has been next to no wage growth. In terms of inequality, the US is at the same level as it was in the 1930s.”
“It is impossible that loose policy will go on forever and it’s impossible to know how it will play out. And surrounding all this, there is an underbelly of unrest – not just in peripheral Europe but France and even the UK, with the evolution of UKIP.”
“There is a greater degree of protectionism these days than there has been at any point in my generation – Russia, Ukraine, Syria, Japan and China, and so on.”
He believes worries over the issues mentioned above will create opportunities, however, and highlights both Brazil and Korea as two markets that are becoming more and more attractive on a valuation basis.
“In general, we prefer east over west in terms of geographical allocations,” he said. “In the west there is a lack of growth and available credit. Until the banks buy into the economic recovery, we won’t.”
Gray (pictured) added: “Volatility in currencies and commodities, and that minor correction in October, have been a good thing. However, on the whole it seems like most people have total confidence in central banks. They are happy as long as they are providing ammunition for rising markets, but that can’t go on forever.”
“Our position was more about value than anything else though. It’s been very difficult to find attractively valued areas in the long, medium and even in the short term. It’s difficult, but we have a few more possibilities and ideas.”
