The UK Manager Who's Bearish on the UK

VIDEO: Where does a UK fund manager invest when he's bearish on the UK? NinetyOne's Simon Brazier explains

Holly Black 1 September, 2020 | 11:37AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Simon Brazier. He is Manager of the Ninety One UK Alpha Fund. Hello.

Simon Brazier: Hi, Holly.

Black: So, do you want to tell us just briefly what the fund does?

Brazier: Yeah. So, we're a core UK Alpha Fund. So, we're diversified by investment theme, sector, style, market cap. So, what we try and do is deliver consistent outperformance through the cycle without taking significant thematic or stock-specific bets, so just trying to give that consistent return to our clients.

Black: And interestingly for a UK fund manager you are not actually very positive on the UK at the moment, are you?

Brazier: Yeah, well, as most of my clients know, I've been a sort of permanent bear for some time. And even before the pandemic I was worried that we were going to enter a recession in the UK I felt the fact that the consumers were pretty much stretched. The savings ratio was very low, and I couldn't really see where growth was coming from. The reality is the pandemic has really changed everything and we've seen the recent numbers are very, very negative. I mean, for me, I'm definitely not in any V-shaped recovery. I think Rishi Sunak has got a very difficult job on his hands balancing the economy as we come out of this very recession. So, I think we could be in pretty troubled waters for at least a year or two.

Black: Is it hard to invest in a region that you feel so bearish about?

Brazier: Look, the fund does invest in overseas names and many of our companies – I mean, I think over 70% of the portfolio's revenues come from outside the UK But actually, the reality is, is that often valuation enables you to buy some good-quality companies. So, Next is a UK retailer that we bought during the pandemic. I think it will come out of this stronger than when we went in. Many of its competitors have gone to the wall. And actually, the valuation for us stacked up. So, you can still find really good opportunities in well-run companies.

Black: And have you done a lot of changes to the portfolio in light of the sell-off and the fact that the pandemic has kind of changed some of the themes or accelerated them?

Brazier: Yeah, we were very lucky. We were very defensive going into the pandemic. So, what we did is, we were able to reduce many of the names that outperformed, take them back to their original weightings and use that capital to do three things. We reinvested into many of the names that we held that came off we thought inappropriately, so companies like Smith & Nephew and Experian and DCC were companies that we were able to reinvest more capital into in March-April. I have this list of stocks called the bench which are the companies I would love to own but they are too expensive. In the pandemic again we had that opportunity. So, that was a company we were able to buy into. And then, there's the third area is what I call my Covid stocks. These are stocks like Ryanair, IHG, EasyJet which we bought into. Now, they haven't seen the recoveries that we maybe would have hoped in the short term. But actually, on a three to five-year view, we think we are buying those quite cheaply.

Black: That's interesting. You're expecting a recovery in the travel sector. So, you don't think people are going to be permanently scared off of air travel?

Brazier: No, but you have to be cautious on valuation. So, for example, our EasyJet numbers, we do not assume that EasyJet gets back to the original flight volumes until 2023, for example. So, we think that it's very much pricing in a very slow recovery. But ultimately, I'm not a believer that actually this changes people's behavior ultimately such that they won't fly. I think once we've got a vaccine hopefully, then things will recover.

Black: Is it hard to look that far ahead that sort of three to five-year view at a time when things are so uncertain and seem to be changing every day?

Brazier: Yeah, that's another good question. I mean, I actually think that's my job. I mean, you have to slightly look through the short-term volatility. I mean, just take an example. With my team in March I said to them, I said, let's go spend the next three months trying to work how this year's earnings and profits numbers are for all our companies because we are going to – we're chasing our tail. That's actually worked out – which companies have great balance sheets, which companies have great market positions and then in a more normalized world now look quite attractive with these valuations, and that's what we spent our time doing. So, if you do your numbers and you are prepared to not get caught up in the short-term volatility, actually we – it's the first time in a long time we found some really interesting opportunities.

Black: Simon, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black  is Senior Editor, Morningstar.co.uk