Sullivan’s £868m CF Miton Special Situations Portfolio, which he heads up with FE Alpha Manager Martin Gray, currently has 28.6 per cent of its assets in cash. The level has been as high as 33 per cent in the last six months or so.
The managers have no plans to significantly increase their exposure to risk assets unless there is a radical improvement in the macro outlook – which they see hugely unlikely – or a significant fall in equity markets.
“We’d be happy to start putting money back in to the markets if we saw falls of 5 to 7 per cent,” said Sullivan (pictured). “In this scenario we’d modestly add to our exposure to equities on the way down.” “However, given what we know today, for us to significantly rotate in to risk assets, you’re talking about a fall of 25 per cent in UK and US equities. Only then would we think about spending our cash weighting.”
At time of writing the FTSE 100 is at 6,718, and so a 25 per cent fall would mean a starting level of 5,039.
The S&P 500 is at 1,667, and so Sullivan would see 1,250 as a decent entry point.
However, the manager points out that even if there was a mass sell-off, it doesn’t necessarily mean he would buy.
“It’s all well and good saying that I’d buy at that level, but that’s only if the outlook remained the same,” he said. “If the market falls by that much, it would suggest that something has happened to knock markets off their perch.”
“Let’s say Lloyds became fully nationalised tomorrow, then the valuations would suddenly look different.”
He says he’d be even less likely to add to European equities after a 25 per cent fall.
“Domestically focused European equities are impossible to rate because you don’t know what the outcome of the eurozone crisis will be,” he said. “We have no exposure to this part of the market.”
Sullivan and Gray (pictured) are ultra-defensive at present, believing that the current surge in equity prices are based on inflated expectations of a global economic recovery. Sullivan likens quantitative easing (QE) to putting “lipstick on a pig”, and says that investors expecting an all-out bull market are likely to be disappointed.
“The fundamentals that need to be dealt with, particularly surrounding the eurozone, have in no way been addressed,” he explained.
“The fact of the matter is, the indebtedness of countries is more now than it was one and even three years ago, during a period when austerity was supposed to be taken place.”
“The pain is yet to be felt by the consumer yet, and this is why we think corporate earnings and profitability will come under downward pressure.”
“For the FTSE to be close to its all-time high, and the S&P to have already broken it, makes me feel a little uncomfortable given everything that is going on.”
Sullivan says the picture is a lot brighter in the US, but thinks the equity market is still overvalued.
“We’re a lot more positive on the US, which is why we have around half of the portfolio exposed to the dollar,” he said.
“However, the markets are pricing in a very robust recovery, which we don’t believe will happen.”
“The headline unemployment figure is coming down, but the part-time proportion is increasing drastically.”
“There’s evidence that the economy is not operating at full capacity.”
Sullivan says the fact companies are sitting on huge cash piles and refusing to invest their money shows that there is still a huge degree of uncertainty regarding the recovery.
Such cautiousness has cost Sullivan and Gray dearly in recent years. Our data shows that CF Miton Special Sits is a bottom quartile performer in its IMA Flexible Investment sector over a one and three year period, with returns of 7.34 and 9.49 per cent, respectively.
Performance of fund versus sector over 3yrs
Source: FE Analytics
Sullivan points out that the fund has consistently beaten cash and inflation over the periods, though.
The long term record of the fund remains very strong indeed. FE Analytics data shows it is a top-decile performer in its sector over the last decade, with returns of 204.86 per cent.
Sullivan says he’s been encouraged by the reaction of existing investors to the underperformance.
“I went to a market update with clients expecting to have to apologise for the performance of late, but I’d say nine out 10 investors were content,” he said.
“Many said: “I don’t buy Miton because I want a high beta strategy, I buy Miton because I want something I can rely on”, which was really pleasing.”
“We’ve been beating ourselves up a little, but the fund has continued to generate positive returns. It’s at its all-time high in terms of unit price, so that’s always a nice thing to see.”
Performance of fund versus sector since launch
Source: FE Analytics
Sullivan says the team are looking far and wide for value plays in their fund of funds portfolio, but are finding it increasingly difficult.
“We’re finding a lot more sells than buys at the moment,” he said. “The only thing we’ve added recently is a Korean preference share fund. We’ve always been a big fan of Asia, but only at the right price.”
“Given that it’s a preference share, we think the reward you get for your risk is more appealing.”
Sullivan and Gray have 13 per cent in bonds, which is split between distressed US debt and Asian investment grade bonds.
Equity funds account for only 32 per cent of assets. The managers have the flexibility to hold 100 per cent in this area.
CF Miton Special Sits has a minimum investment of £1,000 and an ongoing charges figure (OCF) of 1.84 per cent.