CF Miton Strategic Portfolio - Fund update

Martin Gray has a reputation for successfully navigating difficult markets. During 2008 his CF Miton Strategic Portfolio Fund was up 14.7%, whereas the average fund in the Balanced Managed sector was down 21.7%, though past performance is not a guide to the future. His philosophy is to attempt to protect capital through rocky markets, as he feels this is of greater benefit to overall long-term performance than simply chasing big returns when markets are rising strongly.

Please remember past performance is not a guide to future returns.

To do so he pays close attention to the business cycle and the general economic picture. He uses this to decide the overall asset allocation of his portfolio, and then goes about selecting the best investments within each asset class. Few managers are able to get this kind of asset allocation consistently right, but his conservative stance has seen the fund outperform over the long term, and with less volatility than most funds in the sector.

So what does Martin Gray make of the current economic environment? Although governments and central banks around the world have provided liquidity to the markets in the form of stimulus measures and quantitative easing (QE), this has arguably not yet circulated around the economy. Martin Gray is therefore fearful that the failure of these measures could result in deflation, and that this could be exacerbated by the efforts of some regions, such as Europe, to reduce their levels of debt.

Given these concerns Martin Gray has adopted a largely defensive strategy since the middle of 2009. This initially proved costly to performance as markets continued to rise, but since the start of this year the fund’s defensive qualities have shown through and it has held up better than most of its peers. At present the fund has around 40% in cash, though this is denominated in various currencies including those traditionally perceived as safe havens such as the US Dollar and the Japanese Yen. There is also substantial exposure to bonds, primarily through government debt rather than corporate bonds because they are lower risk - his exposure is primarily to nations with sound finances, with particular emphasis on Asia.

Government bonds have risen recently owing to fears of a double-dip recession, which could suppress inflation and mean interest rates stay low. The yields available on bonds would look attractive to investors in such an environment. Nevertheless Martin Gray might look to take profits and decrease exposure in favour of equities when he feels the time is right. However, he remains wary of present stock market valuations and will look to invest more fully at lower prices. As such global equity exposure is presently relatively small at less than 25% and primarily focused on high-yielding defensive stocks, an area Martin Gray believes will benefit from increasing investor interest. He also favours some real estate investment trusts (REITs) such as Land Securities for the attractive income they offer, as well as Japanese small and medium-sized companies because of their exceptionally low valuations, although they are more risky than their larger counterparts.

The current difficult markets have highlighted the benefits of Martin Gray’s strategy of capital preservation. He tends to be positioned conservatively, so don’t expect fireworks when markets are rising. However, the fund should make up for this through resilience when markets are tough, leading to good long-term returns overall if he makes the right calls. We believe the fund represents an excellent core holding for a portfolio and useful diversification against more aggressive funds.