Founded in 2002, MitonOptimal is a private company managing global multi asset management business. The CF Miton Special Situations Portfolio, which Sullivan manages along with Martin Gray is a global macro, multi asset fund investing across major asset classes as well as providing specialist exposure to investment trusts, direct equities, ETFs and structured products.
Sullivan has worked in the finance industry since 1999 when he joined the investment team at the law firm Foot Anstey. The team then became the founder members of iimia plc in April 2002 when the law firm outsourced the investment operation. Rapid growth of the iimia business witnessed the merger with Miton Asset Management and Midas Capital. Sullivan is lead manager on the CF Miton Arcturus Fund.
In an interview with Last Word Media, Sullivan offers insights on portfolio strategy followed in managing the special situations fund along with his take on the global markets.
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Investment Process
The fund manager does a detailed fund research using tools such as Bloomberg score card, FE analytics, and in-house proprietary systems for research, analysis and monitoring portfolios in real-time environment for the special situations fund, which basically works as fund of funds scheme.
"Our starting point is independent economics. We create a portfolio framework where we want to invest regionally and in terms of sectors. We need transparency and regular dialogues with the investment managers. Funds need not always be at the top of the chart. We like liquidity, simplicity, and transparency.”
In order to address the liquidity issues, the fund has invested 18.7% of Sep-end corpus worth £858.3 mn in about 60-65 diverge range of funds.
GLG Japan CoreAlpha Fund, Fidelity ILF USD, F&C Macro Global Fund, Schroder Asian Bond Fund, and JP Morgan Japanese Investment Trust are the top five holdings of the fund.
"We do adopt a very strict asset allocation and only buy those funds that absolutely fit in. It would be very rare that we would buy a global equity fund because that outsources too much stock picking discretion to that fund manager."
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Asset Allocation Strategies
In terms of asset allocation, the fund has about 17.7% of the corpus allocated to UK equities followed by 14.7% to alternatives and 10.4% to Japanese equities.
The fund of funds scheme has "very few direct equities" investments, limited to UK stocks.
“If we buy in other markets say Brazil, Japan, or US, we will always use underlying fund as we do not have the resource to cherry pick individual stocks. Even if our exposure looks higher in UK equities, it is just because they are listed in UK, but the earnings are very much global reaching."
Emerging markets exposure at 0.5% is the least in the portfolio, the reason being he "never believed in the story of decoupling."
"Our belief was that success and failure of developing economies and supply-led economies are still very much tied to the success and failure of western consumers, US, Pan-Europeans and certain parts of developed Asia. Our view is that (if) western consumers is going to come under significant amount of stress, the chances are the developing economies are also likely to suffer, from an equity and GDP perspective.”
According to Sullivan, Asean market is one such region, which is not exposed to western headwinds and is more domestically focused. He also feels "certain parts of South America" qualify under this theme, however stocks look expensive at the moment.
"We would like to rotate our exposure back into Asean economies, but we have to be little patient. We want that domestic story, but at right price. Indonesia, Vietnam, Philippines are exciting due to growth potential. In terms of sectors, no specific view. But as long as domestic focused rather than export driven. For instance, we might look at consumer staples than automobiles."
On increasing allocation to Asian markets, he said "We see a lot of Asian markets more than fully valued at present. The year 2013 has been tough year for Asian and emerging markets, which too us is good. It is coming closer to our radar, its coming into actual investment theme as they are getting cheaper relative than developed markets. We want domestic focus. We don’t necessarily want Singapore, Hong Kong China, which are open economies."
Cash Calls
Sullivan who has personal investments in this fund as well as company’s shares says he does not hold cash as a defensive asset, but as a strategy to invest in other currencies that may appreciate against sterling.
Sep-end, the scheme had a relatively higher cash level of about 24%.
Viewing cash as an asset class, he said, "We have lot of US exposure via our dollar positions, as we do expect the economy to recover and that would be beneficial to strengthen dollar versus sterling."
Since he perceives US equities as fully overvalued, he prefers to play the currency games rather than stocks for now.
While he does see tentative signs of recovery in U.S. , he said the stock market is pricing in much more than that.
"It is almost pricing in an economy being perfect, modest growth, low unemployment, good credit circulation, and we are nowhere near that yet. The market is pricing in a perfect storm, but actually we are still only jaws getting ahead above water."
“So, dollar at this stage is very sensible investment to leverage of that recovery, but equity markets are still very dangerously poised.”
Market Outlook
According to him, the global economic growth is extremely lackluster and lot of the key data still appears to be very fragile and negative.
"The consumption of western consumer is absolutely flat. Inflation is not coming through as it was anticipated despite appropriate amounts of QE. Though the overall unemployment rate looks edging down, there are distorting facts. The part time employment in UK including US is at all-time high, which make the overall employment figure look better than reality. There is a slack in the economy."
He cited concerns over the quantitative easing programme adopted by UK, US, and Japan, as he feels the actual liquidity is not being used to uplift the real economy, but to boost the asset prices.
"So, all this put together does suggest world is not fine yet, five-six years from the nadir of the financial crisis. The world is not fixed. I acknowledge that there are some green shoots and the US is probably ahead of Pan European markets, but is certainly not in a great shape."
Performance Card
Targeting the long-term investors, the seeks to achieve long term returns above inflation.
Over one-, three-, and five-year horizons, the fund has returned 5.3%, 8.1%, and 33.2% compared with sector average of 13.4%, 20.9%, and 44.1%, respectively
"Our investors have shown an awful of patience with us because performance has been rather pedestrian versus the market. Our investors understand why we position so defensively, they understand our concerns of global economy. Our investor base is well- educated and well-informed and they are buying into what we are trying to achieve in the fund."
