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Gray joins Ruffer in equity-income bubble warning

16 August 2012

Dividend paying stocks are in high demand in the current low interest-rate environment, but many experts are beginning to get worried about valuations.

By Joshua Ausden,

News Editor, FE Trustnet

Star manager Martin Gray is the latest high-profile name to highlight the risk of a bubble forming in equity income stocks – though he believes their strong run is likely to continue for now. 

ALT_TAGLike CF Ruffer's Steve Russell, the manager of the sector-leading CF Miton Special Situations Portfolio thinks investors should be watchful of valuations in the highly popular asset class. However, he believes it will take another significant dip in markets for a bubble to form, then burst. 

"It’s inevitable that these stocks are going to be more expensive, with interest rates where they are, but I think we are in for a much bigger bubble yet – one that could potentially be gigantic at some stage," he said. 

Gray’s CF Miton Special Situations Portfolio is significantly underweight risk assets at the moment; according to FE data, it has 35.4 per cent in equities – around the same amount it has in cash. The manager has licence to hold as much as 100 per cent of his portfolio in equities. 

The equity exposure he does have, however, is in defensive, income-paying stocks. The fund-of-funds manager has significant positions in the likes of Polar Capital Healthcare, Worldwide Healthcare and the Diverse Income Trust, and he also has a single-stock position in GlaxoSmithKline. 

He says he is comfortable with his equity income exposure, but is watchful of rising prices.

"At the moment it’s a long way from bursting because people will continue to pay up for quality, reliable companies. However, though [equity income] valuations have been helped by the recent sell-off, we could get a situation where the sector is horrendously overvalued."

Gray’s CF Miton Special Situations Portfolio and Strategic Portfolio have been defensively positioned for some time now. In a recent interview with FE Trustnet, he said he was unmoved by the recent strong performance of equity markets, because none of the major macro problems had been dealt with properly. 

ALT_TAGLike Ruffer’s Russell, the manager is unconvinced by the merits of quantitative easing, and doesn’t think equity markets can rise sustainably until debt levels come down significantly, and GDP growth and employment rates markedly increase. 

Gray (pictured) says the big difference between his views and those of Ruffer is that he anticipates a deflationary environment for a sustained period – not an inflationary one. 

"Eventually we may see inflation go high, but the problem with this argument is that we don’t know how long it will take the liquidity from QE to find its way into the economy," he commented. "I think it will take a while yet.” 

Gray’s cautious stance has held him in good stead; according to FE data, the manager has returned 33.22 per cent in the last five years, compared with 9.84 per cent from his peer group composite, which has also been significantly more volatile. 

Performance of manager vs peer group over 10-yrs


Source: FE Analytics

The manager also has a stellar 10-year record – with returns of 127.74 per cent compared with 87.19 per cent from his peers. He fully participated in the equity rally following the dotcom crash and although he called the credit crunch a year or two too early, his cautiousness paid off handsomely in 2008 – as the graph above shows.  

Both his CF Miton Special Situations Portfolio and Strategic Portfolio are open to new investors, carrying a minimum investment of £1,000.

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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.