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Shock treatment

Ben Yearsley’s Fund Focus

When selecting funds, you have several clear choices to make. Index tracking or active management? Developed or emerging markets? What often gets overlooked is the choice between a fund that will stay fully invested and one that is more proactive, with asset allocation.

Some funds are built with the flexibility to hold big amounts of cash if the manager believes that will help protect investors during times of volatility.

The majority, however, take the view that the job of a fund manager is to invest in stocks and shares and the fund should stay roughly fully invested at all times. There are pros and cons to both approaches and certainly there is room for a variety of strategies in a balanced portfolio of funds.

One fund that can go heavily into cash and other defensives assets is the Miton strategic portfolio managed by Martin Gray. Until recently, the fund was one of the top performers in its sector as its cautious approach paid off during the market turmoil of late 2007 and 2008.

During 2007, the fund was 41st out of 113 funds in its sector – a creditable performance – but did even better in 2008 when it ranked first. This defensive strategy has been largely maintained this year so the fund has missed out on the market rally.

The question is, how does Gray invest? His emphasis is always on making money for investors over the long term, not chasing short-term surges or investing in relation to a specific benchmark. He will happily use cash when he feels it is appropriate to do so and will not restrict this to sterling but potentially also to euros, yen, dollars, etc. He will also invest globally to seek out the most attractive opportunities.

The Miton strategic portfolio invests in other funds. Unusually, however, Martin Gray places more emphasis on asset allocation (that is, choosing- the right assets, countries and sectors in which to invest) than on fund selection.

Gray and his colleagues at Miton therefore spend a lot of time doing economic research and trying to identify which parts of the market offer the best prospects.

Once they have identified an area they like, they will typically back this conviction by buying one of the more aggressive funds of that type.
Running a fund in this way is notoriously difficult, which is why it is especially important to assess funds like this over fairly long time periods (at least five years) to see how they perform throughout the market cycle.

Gray’s current view is that the market is predicting a full and speedy economic recovery but he does not believe that things will go that smoothly. One of his major worries is that the stimulus packages have not helped many of the households or small businesses that they were designed to help.

His view is it is the financial markets that have been stimulated, not the real economy, and markets could experience a sudden shock. He is retaining cash in the portfolio, ready to buy cheap assets in the future.

He believes that the markets will carry on going upwards for some time before the mistake is realised but his longer-term view is influencing the portfolio at present. About 35 per cent is in cash and more than 20 per cent is in government bonds.

Overall, there is only 20 per cent currently invested in shares and the majority of these are listed outside the UK and fairly defensive business offering good yields.

Is Gray a permanent pessimist? I don’t think so. He simply hates to lose money for his investors. Nobody can be right all the time and the current market seems especially difficult to predict.

However, this is the kind of fund that should appeal to those who would rather have a fund manager err on the side of caution. It could also nicely complement more bullish funds as part of a balanced portfolio.

Ben Yearsley is investment manager at Hargreaves Lansdown


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