A fund for a careful outlook - CF Miton Strategic Portfolio

The world is undertaking a huge financial experiment according to Martin Gray, manager of the CF Miton Strategic Portfolio Fund.

Central Banks are making a journey into the unknown by adopting extreme monetary policies such as quantitative easing (QE) and ultra-low interest rates. It is, as he puts it, a variety of elements never before mixed together. It may turn out fine, but equally there could be a dangerous explosion.
 
So far Mr Gray believes this has resulted in all kinds of distortions in global markets, with investors presently happy to embrace rising equity markets. However, he anticipates they will be brought back to earth with a bump. Mr Gray insists the world's economic ills have been pushed to one side, and at some point anaemic growth and stagnant corporate earnings will come back into focus. Although it is tricky to pinpoint a trigger for a correction, he is alert to one particular problem: QE must eventually cease; an event he believes would spook the markets. He is therefore sticking to his cautious approach.
 
Mr Gray has only around 30% presently invested in equities, although the Flexible Investment sector, in which the fund sits, allows up to 100% equity investment. This position is dedicated to areas he considers better value such as Asia and Japan. To help control risk he has a ‘short' position on the US S&P 500, which would benefit from a fall in value of the index. Additionally, a third of the fund is in cash. To take advantage of sterling weakness, this is made up of the US dollar and Asian currencies including the Hong Kong dollar, Singapore dollar and Japanese yen. The latter has weakened recently in the wake of aggressive Japanese QE, though the position has added value for the fund over the longer term. Mr Gray has no euro-denominated assets believing the Euro is overvalued and the eurozone is likely to experience 3 to 4 years of little or no growth.
 
There is a significant fixed interest exposure at around 20%, notably Asian government bonds. Some investors are worried about rising inflation causing bond prices to fall, but Mr Gray sees little evidence of inflation running away. Indeed he points out inflation is lower today in the UK, US, eurozone and China than in 2011. Furthermore, a key characteristic of entrenched inflation, rising wages, is missing. Although not an out-and-out deflationist, Mr Gray is sceptical QE will automatically lead to significant inflation.
 
Although the global economic environment might seem to be getting healthier, Mr Gray warns this is not a time for being brave or taking a high level of risk. For investors in the fund who have seen relatively pedestrian returns over the past three years this is a familiar stance. However, Mr Gray has tactically increased exposure to riskier assets successfully in the past. So whilst I believe this fund is worth considering for those keen to build a defensive core to their portfolio, it should also be seen as an opportunistic fund that may take on more risk in the future.

By Rob Morgan at Charles Stanley Direct