Gray has been on the defensive for some time now, meaning he missed out on the equity market rebound in 2009 and 2010. He has had close to 25 per cent of his CF Miton Strategic Portfolio in cash in the last 18 months, and only a third in the equity market. Balanced Managed funds can hold up to 85 per cent of their portfolio in equities.
However, the manager believes his defensive stance is about to pay off.
"Things do seem to be turning in my favour," he said in an exclusive interview with FE Trustnet. "I was wrong-footed by the effects of quantitative easing on the markets, but the data that came out of the US last week made me feel a lot better about being so defensive."
"The figures seemed to pass everyone by since all the attention has been on avoiding a default, but they were truly awful. UK GDP data has also been disappointing."
Gray says the numbers confirm his fears that the West is set for a sustained period of low growth, low inflation and low interest rates.
"I don’t envisage a crash on the same level as 2008, but as long as the banking system is insolvent, I don’t see any value in risk assets," he said. "There is always a risk of severe down-periods when growth is so sluggish."
If risk assets do go through a sustained period of poor performance, it would not be the first time that Gray’s defensive stance has held him in good stead.
During the last two severe market crashes – the dot com crash and the most recent global financial crisis – Gray was one of the best-performing fund managers in his peer group. Between 1 January 2001 and 1 January 2003, the manager lost 7.11 per cent, outperforming his peer group composite by nearly 20 per cent.
His record in the latest crisis was even more impressive. From 8 August 2007 when credit markets froze, to the start of March 2009 when markets bottomed out, Gray’s peer group lost 25.09 per cent. During the same period, Gray made positive returns of 5.86 per cent.
Performance of manager vs peer group in downturn
Source: FE Analytics
"In the last market crash, I went on the defensive 18 months too early," he explained. "I was very concerned about the residential market in the UK and US, particularly from around 2006. I had a period of underperformance, but my concerns were proved right eventually."
The manager has once again gone through an 18-month period of underperformance; the old adage that lightning never strikes twice – or three times in Gray’s case – could yet be proven wrong.
Gray manages two funds in the Balanced Managed sector – CF Miton Strategic Portfolio and CF Miton Special Situations Portfolio. Both funds are top-quartile performers over three-, five- and 10-year periods.
Although Gray has a high conviction that the Western world is set for sluggish growth, he says yet another bout of quantitative easing in the US could force him to amend his position in the short-term.
"If QE3 does happen, I would have to think seriously about my portfolio. However, it is clear that printing a load of money isn’t going to solve our problems," he said.
"What did the last bout of quantitative easing do? The figures from last week show it did nothing for employment or growth. It seems to me that all it did was help banking profits."