Gilt bull run still has legs - MAM's Gray

Owning gilts has made the single largest contribution to recent performance of the £761m Miton Special Situations fund, and there is more money to be made in the asset class, said manager Martin Gray.

He last bought gilts last year at a 4.5% yield, and also has some exposure to the asset class through funds including the Thames River Global Bond fund, run by Peter Geikie-Cobb.

Gray has taken profits on gilts as prices have soared, and said he would not look to add more to the fund unless he sees a short-term uptick in yields.

“Who would have believed we would see 30-year gilts below 3% and 10-year gilts below 2%? It was unimaginable. We were very bullish on gilts and we have made a lot of money. We have taken some profits but that does not mean there is a bubble or that you will not be able to make more money in the asset class," he said.

“The Bank of England is printing so much money that there is a lot of liquidity washing around the market, and it has to go somewhere. The gilt market will continue to stay at these levels, however, I cannot see us buying unless we see a short-term spike.”

Looking to equities, although European stocks look cheap, Gray holds no euro-denominated assets and would not dip a toe back into these markets without greater clarity on the outlook for the eurozone.

“We would only buy European equities when we saw more certainty over the future of Europe, and more direction and political leadership. Valuations are cheap, but it is a mess and I would rather stay well clear.

“It is hard to know what is going on in Europe, people are just enjoying the liquidity being thrown at it by the ECB. Portugal will inevitably follow Greece – it will not meet the targets agreed with the ECB. Spain and Italy have a long way to unwind as well. The European banking system is awash with liquidity, but no-one has addressed the solvency issue.

“I am sure we will have more Dexias - more banks will be part or fully nationalised over the next six months to two years, which will put pressure on the financial sector.”

Sentiment on the US has been increasingly bullish as macro data has continued to surprise on the upside, but Gray warned the economy still faces a challenging 2012.

“We have seen some good numbers out of the US over the last quarter, such as a fall in the unemployment rate, but it will be a tough year for the US economy with this political stalemate going on. We will be watching the numbers closely over the next few quarters,” he said.

Gray’s largest equity weighting is to Japan, with Stephen Harker’s GLG Japan CoreAlpha fund among the portfolio’s top ten holdings.

“There are a lot of terrible things in Japan - the demographics do not look good, but dividends have room to grow and corporate earnings can rise,” the manager said.

He is still running cash at more than 30% on both his Special Situations and £212m Strategic funds as part of his ‘aggressively defensive’ approach, and has recently been picking up selected property ideas, notably prime REITs, in a bid to find sustainable yield.

He has also been adding to Asia through money market funds, low risk sovereign debt and investment grade bonds, rather than through the equity market.

Special Situations has returned 20% over the three years to 20 January against an average 37.4% from the Mixed Investment 40-85% Shares sector.

Over one year it has fared better, returning 3.2% against an average 1.9% fall, placing it in the top quartile of the peer group, according to Morningstar.