The MitonOptimal co-manager discusses integrity, QE and how to pick funds…
Today we kick off a new series in which each month we will interview a fund manager.
In this first instalment, we have turned the spotlight onto MitonOptimal Special Situations Fund co-manager James Sullivan.
James co-manages with Martin Grey who has been at the helm since the fund's inception 20 years ago.
What is it that attracted you to managing money and what is it that keeps you interested?
James Sullivan: I was always very indecisive about what I wanted to do career-wise, and even a little jealous of those who were set on the route they were going to go down as a career. I was originally attracted to marketing, and then when I realised the marketing industry was not as glamorous as it was in the 1960s, I thought I should try and find something else.
I always had a passing interest in stocks and shares and was fortunate enough to be offered a job by a law firm in 1999, which had an investment team within it. The team was only small, but it was a great initiation into the world of finance. It was comfortable and I was given time to study.
I also recognised, having grown up not having parents in the industry, that investments were not just something for the rich and famous. In fact, small amounts of money mean more to most people than vast sums to others.
There is an element of integrity or one’s moral compass to which one must remain observant, no matter how big the pot of money is that one is managing.
Integrity and ensuring clients are at the centre of what we do, is something we at AES International put substantial focus on. How does this translate when investing money?
JS: Observing that “rule”, if you like, which is imbedded or ingrained in us, does sometimes mean you miss out on opportunities because you do not want to just throw money at markets, regardless of fundamentals.
But if markets are not underpinned by good fundamentals or are not sustainable, you want to try and protect capital on behalf of your clients. This slightly contrarian view of wanting to protect the capital, as well as our value, can sometimes leave you lagging in rising markets. However, over a full cycle, that approach is very powerful as it proved to be over various sell-offs in 2008, 2011, and going back all the way to the turn of the dot-com boom and bust.
You have been managing the MitonOptimal Special Situations Fund now for approaching 10 years. What have been some of the most challenging, and likewise, rewarding periods during that time?
JS: Every day has its own challenges, but the biggest challenge has been the quantitative easing (QE)-fuelled market, which we believe to be irrational. We believe valuations are unsupported by earnings.
So the challenge becomes “how do we keep our head above water with our defensive allocation, while justifying our existence in a client’s portfolio?” This can be difficult, because as I said before, we do not just want to throw money at markets regardless of where they are priced.
At the same time, this approach has been extremely rewarding over the periods we just touched upon – 2008, 2011, and other points in the cycle.
Your co-manager Martin Grey had been managing the portfolio for around 10 years before you joined in 2006. Was there a shift in how the fund was managed when you came on board?
JS: I was very privileged when Martin asked me to be co-manager in 2007. At that time, the hierarchy was that Martin had been lead manager on that fund since inception and in many ways, it was Martin’s baby, Martin’s product, he brought it to the market and I respected that fully. As we developed our relationship, it certainly matured for the better and I think it continues to mature and develop over time.
Would you say you have a different style of management?
JS: Again, that has matured and developed over time. Martin’s approach was very much top-down, interpreting macroeconomic data, then creating an asset allocation framework that best fits the current environment and then populating that asset allocation.
I came from a background that was much more focused on bottom-up stock selection so Martin introduced me to a new way of putting a portfolio together.
The old studies all suggest that nine-tenths of performance comes from asset allocation and I either lost sight of that at the time, or I probably was not fully appreciative of it. Martin reminded me of that fact.
So when I joined, Martin did much more of the top-down asset allocation element of the role. My role was to go out and find investments to play those themes.
As I matured and as that dynamic changed and evolved, I think we both certainly had a say in the asset allocation and the interpretation of the economic data. I would still say I do the lion’s share of the bottom-up, but it has probably progressed from a senior and a junior hierarchy to more of a co-management approach.
Looking at the fund itself, can you explain what exactly it aims to offer investors?
JS: The objective is pretty simple. We are not benchmarked and we are not relative investors, i.e. we have an absolute return mind-set. If we do not think we can generate positive returns, we are happy to keep our powder dry until we see absolute value in markets.
The objective of the fund is to add value while being mindful of the level of volatility and the trajectory of performance.
It is a global fund and unconstrained – so we can go into any asset class with as much conviction as we see fit.
We believe it is a fund for all cycles because we are doing the crystallisation of profits within a fund and then we are cycling it back into undervalued areas of the market. It is not necessarily a fund that you would typically top-slice or add to at different points. Our job is to do that within the funds across various asset classes.
Would you say, therefore, that it would be a core fund for a portfolio?
JS: Yes, it is. I am not an adviser, so I would not tell somebody how to hold it or who to buy it for. But, typically, our clients hold it as a core fund within their portfolio and then they would bolt on some more “excitement” around the fringes where they see fit.
How does your fund access markets?
JS: We are primarily a fund of collectives. The collective can be anything from exchange traded funds to an investment trust or another open-ended fund.
We only buy direct equities where we have absolute transparency or we have as much knowledge as the market, so, for example, a UK stock. Even then it will only be a modest weighting within the portfolio.
So how does the portfolio stand at the moment?
JS: We have recently been crystallising gains, specifically we have been taking profits from elements of the equity components of the portfolio, with the net equity exposure now around 20%.
Incidentally, I believe crystallising gains is one of the hardest disciplines, because you do not want to give up too much upside. At the same time, you do not want to be selling something that is making a loss in a portfolio. So I have always found that selling is the hardest discipline – buying is easy. Unless you crystallise paper profits, they are meaningless.
What we are seeing, hopefully, is a bit more volatility coming into markets. We have seen some of the bond yields start to move out – okay, it is still negligible, German Bunds are still at 0.5%, but it was only recently we were talking about German Bunds going negative.
So we are starting to see bond yields move out and I think that is feeding through to equity markets and other markets, and we are starting to now get some volatility pick up in all asset classes. This will now provide us, hopefully, with some opportunity to redeploy those crystallised gains into other areas of value.
It looks from the factsheet that there is a bias towards the UK. Why is this?
JS: Despite the factsheet looking like we have a UK bias, actually it is not fully reflective of the positioning of the portfolio. Some stocks listed in London can actually have no exposure or very, very minimal exposure to the UK consumer or the UK economy. Standard Chartered is an example of that. All its earning are exposed to the Asian consumer or the emerging markets, which, to us, is far more exciting at this stage in the cycle than the developed and potentially recessional West.
The fund is also invested in the Coupland Cardiff Japan Alpha fund. What is it that is interesting about Japan?
JS: There is a lot that is interesting about Japan. Not all good, of course, but very interesting.
One positive is that it is coming from a very low base in lots of different ways, so the room for improvement still remains significant. Of course, we are not naive enough to believe that is going to necessarily happen overnight because when we look at the economic woes, they are still there. The debt to GDP ratio remains at 230%, which is two and a half times the size of the UK ratio. The quantum of debt is significant.
Yes, they own their own debt, so the profile is slightly different. The demographic is horrendous. They are an economy that does not really embrace, dare I say, foreigners too well, so that demographic is not necessarily going to improve overnight. We have to accept that and then almost isolate the stock market and ask whether it represents fair value, despite those economic stresses.
The fact that it was trading not so long ago below price-to-book and Abenomics were just coming into play. We felt that, despite those awful economic stresses, the market was right for reappraising. We had exposure to it before and we have got exposure to it again.
Aside from these areas, the portfolio does look quite defensive at the moment with around 50% invested in managed cash. Firstly, can you explain what you mean by managed cash and also why you have such a high allocation to it?
JS: To us, cash is an asset class in its own right and it should be held in a portfolio and judged in isolation, the same way that one would judge an equity market, a bond market, or a property market.
The reason we call it ‘managed cash’, not just ‘cash,’ is because with our global mandate, we own a lot of currencies at different points in the cycle. We have owned large positions in dollar. But unwound a lot of that on the back of the strength we saw in Q3 and Q4. We have historically owned large amounts of Japanese yen and that was what served us extremely well in 2008, when the markets sold off aggressively.
At the moment, we are more sterling-neutral than we have been for some time. With QE being in play, it has changed the dynamic of the currency market. Currency markets are notoriously hard to interpret anyway, let alone when you have various economies pumping various amounts of money into the system. So as and when we rely on fundamentals again rather than QE-fuelled liquidity, I would expect to see currency plays come back into the portfolio to some degree. At the moment, as I say, we are rather sterling-neutral because the Foreign Exchange markets are not presenting much in the way of value and opportunity.
As fund pickers, it will be interesting for investors to know what it is you are looking for when you pick a fund manager.
JS: What I like to see is a manager who has been at the helm of a fund through various cycles, and I also know that he or she is going to be at the fund through the next cycle.
An unfortunate dynamic of our industry is that the average stewardship of a fund is something like two and a half to three years, and I do not like that lack of accountability. I like to invest with somebody today knowing they are still going to be at the helm of that fund in five years’ time.
If you are interested in investing in this fund click the link below and you will be contacted by a qualified financial adviser who will be able to help you.
James Sullivan works for Coram Asset Management which currently has the mandate for the management of the MitonOptimal Special Situations Fund. To find out more about Coram Asset Management and their other funds visit http://www.coramam.com/