MAM’s Gray eyes return to gilt market

UK based MAM Funds manager Martin Gray is considering developed market government bonds with a view to reinvesting in the asset class, after taking profits over the summer.

The manager of the £840m Miton Special Situations and £246m Strategic funds said he made “unbelievable gains” from his positions in government bonds when he cashed them out between early May and late June this year. At the time, gilts made up about 10% of the Special Situations portfolio.

Gray (pictured) said the market is still volatile to macro level shocks, so he expects government bond yields could rise for a while before dropping back to historic lows as investors seek safety.

“As risk-on liquidity hits markets, if this carries on for a bit longer, I would not be averse to moving back in. If yields spike, we would take that as an opportunity,” he said. “US treasuries and German bunds have got back to 3% again. If those yields continued to drift upwards, we would be watching very carefully.”

Although government bonds have provided a welcome boost to the funds, Gray conceded he did not foresee the strength of sterling, and this has hit performance. Special Situations has 60% in non-sterling assets, which Gray described as a notable position against the pound.

“Money printing has made sterling more buoyant than I ever would have imagined. This has been a short-term drag on performance, but I cannot believe sterling will remain strong forever,” he added.

Gray’s favoured area for some time has been Asia, with allocations to China and Japan forming a key part of the funds. Gray said he does not see Asia as being in bubble territory, but admitted a significant slowdown in Chinese growth would have a very damaging impact on global markets.

“As we have seen during every setback over the last five years, these markets tend to fall further when money is withdrawn, and we could see that happen. But they are not fully valued – they are 70%-80% down from their all-time highs, which was 20 years ago for Japan and four years ago for China.

“There will be opportunities there, but not necessarily on the main market where there are a lot of state-owned stocks. The opportunities will be further afield,” he said.

The manager expects China will post GDP growth of between 5% and 8% for next year, and may not publish the true figure if it is worse than predicted.

“China is a ‘known unknown’ at the moment – we are getting mixed messages from the statistics coming out of the country. The slowdown is perhaps not fully discounted. You would see some pretty substantial falls if GDP growth went to 5%, it would be a huge shock to risk assets.”


This article was first published on Investment Week

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