At a time when the dividend yield on Wall Street is lower than it was before the crash in 1929, professional investors have found comfort in huddling together like sheep

INVESTMENTS

There can be few doubts about who has been the talk of the town this week in the investment management business. The man making the headlines has been Tony Dye, the man responsible for investment policy at PDFM, the UK fund management arm of the Swiss bank UBS. He, as I mentioned just a few weeks ago, is the fund manager who since the start of last year has been not just consistently but exceptionally and openly bearish about Wall Street.

As the New York market has continued to power up, defying all the doomsayers, his contrarian position has inevitably attracted increasing attention. His heavily underweight position in American shares, coupled with his large holdings of cash, has pushed his firm well down the industry's performance league tables in recent months, leading, so it seems, to mutterings from some of his clients.

As PDFM shares with Mercury Asset Management the title of the largest pension fund manager in the country, we are talking about one of the heaviest hitters in the whole London market, and therefore about large sums of money.

PDFM manages a total of pounds 51bn for its pension funds clients. Thanks to the strategy endorsed by Mr Dye, it now holds over 15 per cent of this pile in cash, the highest level for many years.

It is, one suspects, of only marginal comfort to PDFM that the reason their man is in the headlines is because of his investment policy - rather than because of some scandal in the way its funds have been administered.

What makes PDFM's stance stand out is not so much what Mr Dye and his colleagues think about Wall Street and stock markets generally, but the certainty with which they have stuck to their bearish views, and the extent to which they have been prepared to back them when it comes to implementing their investment strategy.

Most UK fund managers, as it happens, are also wary about the level of the American stock market. The statistics show that UK pension funds collectively have been net sellers of US shares for five of the last six quarters, and their holdings of US shares have fallen from roughly 7 per cent of their portfolios to just 4 per cent in the last four years.

Managers of investment trusts and unit trusts have also been scaling back their holdings in North America because of concerns about the high valuations being put on most Wall Street stocks. At the same time their holdings of cash have roughly doubled over the same period.

But few professional investment managers have taken this view to the same extremes as Mr Dye. So concerned is he about valuation levels that he has cut his holdings of US equities to virtually nothing, and raised his cash holdings to two-and-half times the industry average. This stance only makes sense, in investment terms, on the assumption that the US and other stock markets are going to fall quite sharply in the near future.

Amid all the headlines, Mr Dye remains defiantly certain that he is doing the right thing, And quite rightly too. He is being paid handsomely to back his investment judgement, and it would be ridiculous to change his mind or his methods just because everyone else seems to be taking a different line. All the great investors in history have made their money by having the courage to back their convictions when the herd was going down a different route.

Much of Mr Dye's reputation in fact rests on his ability to successfully outcall the rest of the market. He correctly anticipated the crash in the Tokyo stock market, for example, selling all his holdings there well before the Japanese market began its free-fall in 1989. The subsequent drop saw the market's value decline by 60 per cent before the tide finally turned last year.

One reason Mr Dye's stance now looks so lonely is that, while he has been sticking bravely to his guns, other fund managers have been becoming increasingly consensual in their approach. Their investment strategies and therefore their performances have been moving closer and closer to each other over the last two years, making it virtually impossible to distinguish one from another.

This is exactly what you would expect when markets are moving out of their traditional valuation ranges. At a time when the dividend yield on Wall Street is lower than it was before the Wall Street crash in 1929, professional investors naturally find comfort in huddling together like sheep. If things go wrong, they know they won't get fired if everyone else has made the same mistake that they have.

There is one other point in Mr Dye's defence. It is easy to forget that the money he is investing belongs to pension funds, not to speculators. Pension funds more than anyone need to take a long-term view of their investments. Their priority is to meet their long-term future liabilities without undue risk, not just to top a short-term performance table. The big unknown is whether Mr Dye is right or not. There are two clear schools of thought. One says that Wall Street remains wildly overvalued, and is heading for a serious tumble, probably at the first sign of an increase in US interest rates (now widely expected to be imminent). Many smart investors, including Sir James Goldsmith, are known to share this view. The other school prefers to take the view that current valuations, while high by historical standards, can be justified because of special factors - the high level of one-off dividends, share buy-backs and so on.

Who is right? It is quite possible that the bull market will go on rising for a while before it finally stumbles. Robin Griffiths, my chartist friend at James Capel, now thinks Wall Street could shoot well over 6,000 before the bull finally expires next year. Mr Dye, we can be sure, is well able to look after himself. More worrying is the fact that he now seems so isolated. When professional investors behave more and more like sheep, it is normally a sure sign that a sharp movement in the market is on the way.