The FTSE has rallied over the last six months and Brazier (pictured), who runs the £1.1bn Threadneedle UK fund, says this upswing will continue over the next decade as UK corporates are healthier than they have been for the last few years.
Though the manager says there will be volatility along the way, he believes it will only provide further buying opportunities. “I actually had a question just before this meeting asking me whether or not 2013 will signal the end of the secular bear market in the UK or will the risk-on risk-off phase continue, but I think the secular bear market ended in 2009,” he said.
Looking at the performances of equity markets over the last 60 years, Brazier says there have been two bouts of secular bull markets in the post-war period.
The first of those came on the back of the reconstruction after the war while the second came in the 1980s as there was a reflation of the global economic system and the banks began to take on more debt.
Looking at the current price-to-earning [P/E] ratios, Brazier says markets are in a similar position as they were in the early 1980s.
“I think we are at the start of a secular bull market in the UK as companies have been deleveraging, there has been a real pick up in global trade and the UK companies are seeing great growth in overseas markets.”
“We have seen that UK equity markets have re-rated to 12 times earnings. Looking back in the past where equities have been at 12 times earnings, investors have been guaranteed 10 per cent per annum average return over 10 years.”
“At the moment equities, relative to bonds, look very attractive. I think UK gilts actually offer investors return-free risk as a 1.7 per cent yield is useless unless inflation stays very low or the world falls apart.”
“The great thing about the UK equity market is that it has the highest dividend yield – around 4 per cent – and compared to the US, Japan, Europe and the US it has the lowest PE ratio. UK corporates are in pretty good positions as they have recovered their balance sheets, their net debt is down and M&A activity has picked up.”
“However, what we need is a pick-up in capital expenditure to really drive growth.”
“What you will see is that markets are not a nice bell-shaped curve, yes markets have gone up but volatility will remain.”
The manager says that this volatility will present buying opportunities, however. For instance, Brazier says he began buying some of the more defensive growth names – such as Unilever – in the last few months on a relative valuation basis.
He believes that although issues on the continent will cause short term uneasiness in the market, he is confident the crisis can be dealt with effectively.
“There is no doubt that there are exogenous risks, but politicians have proved they can get through those with an eleventh hour deal – well usually it comes at 11.59,” he said.
“Even in Cyprus the policy makers have the ammunition to deal with the problem, though I am not saying it will affect the risk-on risk-off nature of the markets. However to be honest those sort of issues just provide the opportunity to exploit the markets.”
“The crisis will roll through and I think it is solvable and manageable. There isn’t that systemic risk anymore that can really hurt markets in the long run.”
The four crown rated Threadneedle UK fund has consistently beaten the IMA UK All Companies sector since Brazier took over the fund in April 2010. The fund has also beaten its FTSE All Share benchmark by over 10 percentage points in the process.
Performance of fund versus sector and index since April 2010
Source: FE Analytics
The fund has performed well as markets have strengthened over the last three months, as its returns of 11.13 per cent make it a top quartile performer.
As well as running a number of portfolios at Threadneedle, Brazier is also the company’s head of UK equities. He has also previously managed growth funds at Schroders.
According to FE Analytics, during his career running funds in the IMA universe he has returned 41.23 per cent – nearly doubling those of his peer group composite.
Performance of manager versus peer group composite since April 2006
Source: FE Analytics
He says his investment process is based on a valuation model.
“We obviously think that markets are inefficient and we look at companies on a three year view, we are not very good at making six week predictions.”
“We feel that short term volatility will always provide long term buying opportunities. One of the big calls we made last year was buying Tesco after its profit warnings.”
“We bought it at nine times earnings at £2.90 a share with a dividend of 6 per cent. So far, the share price is up over 20 per cent.”
Despite his valuation process, he says there are certain areas of the market that are still too risky – such as UK banks.
“I am absolutely fine with missing the missing the so-called bank rally over recent months. I think it is absolutely clear that by holding asset managers and house builders you are getting similar exposure to domestic banks without the risks.”
“Also, you would have had to have been very acute to be at the banks at the right time anyway,” he added.
Brazier’s Threadneedle UK requires a minimum investment of £2,000 and has an ongoing charges fee (OCF) of 1.68 per cent.