It’s sod’s law that markets took a turn for the worst just as bearish managers Martin Gray and James Sullivan left their posts at Miton.
The duo’s wariness of both valuations and the global economic recovery resulted in a dreadful period for their CF Miton Special Situations fund post the 2008 crisis, tarnishing an otherwise strong long-term track record.
Volatility has steadily increased since February, culminating in the first 10 per cent sell-off in the FTSE for over a year this autumn – an environment in which Sullivan and Gray tend to thrive. Moreover, some of their highest conviction positions, including long positions in Japanese equities and the US dollar, have started to bear fruit.
The pair have always prioritised capital protection above all else and while they have most definitely made mistakes in recent years, they remain popular with ultra-cautious investors or those looking for an insurance policy-type fund to diversify an otherwise risky portfolio.
Indeed, it’s clear they still have many admirers.
“Good to see this duo back together, and [strengthens the choice] for our clients in this area,” said one financial services professional at the bottom of a previous FE Trustnet article.
“[It’s] nice to have managers with power in their convictions, focussing more on clients and less on the benchmarks.”
Sullivan told FE Trustnet earlier this week that his new firm Coram Asset Management is on the verge of launching a cautious and balanced fund for investors, with a more growth-focused portfolio not far behind.
Here, we look at six of the funds he expects to make an appearance across the range.
Invesco Perpetual UK Strategic Income
In spite of Sullivan’s wariness of developed market equities, he says there are some funds that still have a place in his portfolios. His emphasis on downside protection means he has a natural bias towards defensive income-paying managers, which offset volatility with sustainable and hopefully growing dividends.
“We still hold Invesco Perpetual in a very high regard, which plays into our sustainable income theme,” he said. “I’m not necessarily saying that Mark Barnett is better than [Neil] Woodford, but we’ve got a very good relationship with Mark.”
Sullivan says he has historically chosen the Invesco Perpetual UK Strategic Income fund over the Perpetual Income & Growth Investment Trust, which has tended to trade on a premium in recent years. However, the manager says he might be tempted to go down the closed-ended route if this changes.
Barnett’s £919m UK Strategic Income fund is a top quartile performer in its IMA UK All Companies sector over one, three, five and 10-year periods and is ahead of the All Share over all four periods.
He took over the multi-billion pound Invesco Perpetual Income and High Income funds from Woodford in March 2014, achieving outperformance in spite of significant outflows. Barnett’s three funds are behind CF Woodford Equity Income since its launch in June of this year, though.
Performance of funds and index since June 2014
Source: FE Analytics
Barnett is currently wary of the air of optimism surrounding the UK economy, believing that defensive sectors such as healthcare and tobacco remain the best places to be invested on a risk-adjusted return basis.
Dividend growth, rather than a high yield, is central to his investment thesis, leading his funds to drop out of the IMA UK Equity Income sector earlier this year.
“Again, Gervais Williams plays into the sustainable dividend growth story but on the smaller end,” said Sullivan.
“As I’ve always said, I’ve only good things to say about Miton and would always be interested to invest in Gervais.”
The CF Miton UK Multi Cap Income portfolio is number two in its IMA UK Equity Income sector since launch in October 2011, with returns of just under 80 per cent. Only Marlborough Multi Cap Income has returned more.
In spite of its small to micro-cap focus, the fund has been significantly less volatile than its peers – another feature that undoubtedly suits Sullivan and Gray’s process.
Williams looks to offset the riskiness of smaller companies by heavily diversifying his portfolio. He has more than 100 holdings, with the top 10 making up just 15 per cent of assets.
Performance of fund and sector since launch
Source: FE Analytics
The fund, which is yielding 3.72 per cent, recently re-opened to new money. Williams says it will most probably close again soon, meaning that retail investors will have to act fast if they want exposure.
Alternatively, some may be tempted by Williams’ Diverse Income Trust, though it is currently on a slight premium.
Baillie Gifford Shin Nippon IT
As mentioned earlier, Gray and Sullivan have long identified Japan as one of the few value plays left among developed economies.
As well as boasting cheap valuations, the reflationary measures of the government could give certain companies a big boost, which Sullivan says makes the case for a fund such as Baillie Gifford Shin Nippon IT.
“We’ve been big supporters of John McDougal for some time,” he said. “He gave us the domestic exposure we wanted earlier this year, because at the time the yen was strengthening. We wanted to shy away from export-led companies.”
“Since we’ve gotten out of the market there has been some weakness in the yen, so small and mid-cap exposure is where we’d want to be.”
Baillie Gifford Shin Nippon IT is invested predominantly in small and mid-cap companies. Sullivan says he prefers using investment trusts for a niche area such as this, as it helps to offset liquidity risk.
Performance of trust, sector and index since May 2007
Source: FE Analytics
McDougal has beaten both his MSCI Japan Small Cap benchmark and IT Japanese Smaller Companies sector since he took over in May 2007, though he has operated with significantly more volatility.
Baillie Gifford Shin Nippon IT is trading on a 2 per cent discount and is 9 per cent geared.
Bonds
“In the bond markets, we like Asia the most,” he said. “We like it for the obvious reasons – balance sheets are stronger, they had their credit crisis 15 to 20 years ago and are therefore in much better shape.”
Sullivan tends to go for the Schroder ISF Asian Local Currency Bond fund, which can use both long and short positions to benefit from currency movements. This helped the fund protect very effectively against the downside in 2008, though it struggled in 2013, losing more than 8 per cent.
He believes there is some value in developed bond markets, but thinks investors need to be very selective.
“For core bond exposure we want global focused managers. We like Stewart Cowley at Old Mutual and Jim Leaviss’ M&G Global Macro Bond fund,” said Sullivan.
“We want to outsource developed market bonds to experts with maximum flexibility, so they can take advantage of short-term trends.”
“Bonds are actually fairly priced given where inflation is, but we have seen some volatility recently. We want as much flexibility as possible.”
The £1.1bn M&G Global Macro Bond and £620m Old Mutual Global Strategic Bond funds have both had a very tough time since February 2013, losing money in both cases.
Performance of funds and sector over 3yrs
Source: FE Analytics
Cowley’s fund has only made a slight gain over three years, with a number of short positions hurting performance considerably this year.
