Skip to the content

Brazier: FTSE set for more volatility – but I’ve got the recipe to beat it

08 July 2015

The UK index has recently been thwarted by the Greek crisis, and the former Threadneedle manager thinks volatility will continue to trend higher.

By Joshua Ausden,

Head of FE Trustnet Content

It’s going to be much more difficult to generate compelling returns in UK equities over the next five years compared to the last, according to Investec’s Simon Brazier (pictured), who expects volatility to be in plentiful supply.

Brazier, manager of the Investec UK Alpha fund, says much of the “easy money” in UK equities has already been made but thinks there are enough companies with quality management trading at attractive valuations.

The FTSE 100, along with the majority of global equity indices, has suffered a significant sell-off in recent weeks in light of Greece’s ongoing debt crisis. Brazier thinks the volatility is set to continue, as valuations no longer give companies as much margin for error.

“I love volatility, but we haven’t had enough of it,” he said. “I think we’ll certainly see more of it. Returns will be far more muted over the next five years.”

“We have low growth, a plummeting oil price, a major slowdown in China and various geo-political risks. We will see more volatility, but that doesn’t mean you can’t make money.”

“In 2009 and 2010 there were valuation opportunities across the board. The market was on six to seven times earnings. The market is now on 16 to 17 times earnings. They are fair, if not full in some cases, which means there is no longer room for disappointment.”

“How do you make money in this environment? To grow in a low growth world, a company needs to generate cash but rather than simply paying that out as a dividend, I’m looking for those that reinvest their cash flow into more growth.”

Brazier says one of the most important – and arguably most difficult – factors to identify when analysing a company is how good it is at reallocating capital. This, he says, will be the key to outperformance in the coming years.

“Tesco hasn’t had big problems just because it’s in the food retail sector. The problem is that it’s reinvested its money in the wrong places,” he said.

“If you take Booker, on the other hand, which is in the same industry, it’s done a great job at reallocating capital. It’s grown its online distribution channel and made a number of very good acquisitions.”

Whereas companies that pay out high and sustainable dividends are in high demand, Brazier says he’d rather find those that reinvest their cash pile in order to make even bigger profits.

He highlights Merlin Entertainment – the owner of 105 theme park attractions worldwide including Alton Towers and Legoland – as a prime example.

“The company is able to generate a free cash flow yield of 6 to 7 per cent, which it could pay out as a dividend,” he said. “However, by reinvesting this cash it’s able to generate 30 per cent of returns thanks to new acquisitions. This is the type of business I’m looking for.”

Brazier says companies that have removed ineffective chief executives with much better allocators of capital can throw up particularly exciting opportunities.   

“G4S is one that we own. It was previously run poorly, but since Ashley Almanza has come in it’s doing much better. It’s one of the few companies we can find which has organic top line growth of between 5 and 8 per cent,” he said.

“Compass is another one that was run poorly, but Richard Cousins has turned things around.”

Cousins was appointed as chief executive in mid-2006. Prior to his appointment Compass had a very poor couple of years, but since his arrival its share price has risen on average by 17 per cent a year. It has made a positive return every year, including 2008.

Share price performance of company and index over 15yrs

 

Source: FE Analytics

Brazier says he’s keeping an eye of Balfour Beatty, which appointed Leo Quinn as its new chief executive last year.

He rates Charles Wilson, chief executive of Booker, as one of the best allocators of capital in the UK and says he’d be interested to buy any business that he runs in the future. Booker’s share price has risen by more than 300 per cent over the past five years.


 

Brazier is rated as one of the best large-cap focused managers in the UK. Like former Schroders colleague Richard Buxton, he has managed to consistently outperform without having to take significant small or mid-cap overweights.

Cannacord Genuity’s Justin Oliver told FE Trustnet last year that he rated Buxton and Brazier as the best two best stockpickers in the UK. 

FE data shows Brazier has significantly outperformed his peer group composite since he started running UK portfolios back in April 2006. He has outperformed in both rising and falling markets.

Performance of manager and peer group composite since April 2006

 

Source: FE Analytics

Prior to joining Investec he ran Threadneedle UK between May 2010 and September 2014. The fund returned 61.73 per cent over this period, compared to 47.91 per cent from the All Share and 51.65 per cent from the IA UK All Companies sector average.

Brazier notes that around 80 per cent of his outperformance has come through stockpicking, which should hold his Investec fund in good stead if there is indeed a harder market backdrop for UK managers.

His £289m Investec UK Alpha fund has had a solid start since he took it over in January 2015, slightly outperforming its FTSE All Share benchmark with returns of 5.63 per cent. It is lagging its IA UK All Companies sector average though, which is up just over 7 per cent.

The manager refers to his fund as being style-neutral, capable of outperforming whether the market is rising or falling.

Brazier has indeed been extremely consistent during his career, never posting bottom quartile performance over a calendar year, which differentiates him from Buxton who tends to be top quartile in rising markets and bottom quartile in falling ones.

One area of opportunity that Brazier is particularly optimistic about is the UK retail banking sector, which until only recently he was all-out avoiding.

Brazier bought Lloyds in 2014, which currently has a 3 per cent weighting, and initiated a 2 per cent position in RBS for the first time since the financial crisis last week.

“Previously I was opposed to banks. In 2009 and 2010, many managers were buying banks because they were cheap, but I was of the opinion that I could hold companies with the same kind of exposure to the economy but without the risk,” he said.

“You could buy Persimmon on half book value. It’s not trading on two times book value rather than 1.3 for RBS, so the risk reward has shifted.”

“As of six weeks ago, RBS was uninvestable. I had no idea what its plan for the future was, but now we know that it’s looking to shrink its CIB [corporate and institutional banking] business to become a core UK-focused retail and business lending bank.”

“It’s going through a process of restructuring, simplification and rehabilitation. Based on the valuation, is there now an opportunity? I’d have to say yes.”

Brazier says the bank still faces headwinds such as the ongoing PPI scandal, but is confident that the strength of the UK economy is supportive of its transition.


 

“When I look at the UK economy, I think it is pretty set for the next 10 years,” he said. “We will have a pro-business and pro-market government for the next decade in my opinion. If Labour are to win the next election, they’d have to change their stance.”

Performance of stocks and index over 8yrs

 

Source: FE Analytics

Brazier currently has nothing in Barclays, arguing that it doesn’t have a clear enough vision of what it wants to be as a business. He says he rates recently appointed chairman John McFarlane, however, and believes it could become a part of his portfolio in the not too distant future.

He sees Lloyds as having the most solid business model at present and has recently upped his stake following weakness in the share price.

“It has by far the greatest clarity in where it wants to go,” he said.

“Lloyds has gotten its balance sheet intact and is a much cleaner business all round. Its focus now is on making decent returns and reducing its cost base, and from a political point of view I don’t see it being beaten up – the Treasury clearly wants out.”

Investec UK Alpha has ongoing charges of 1.05 per cent and is available on all major platforms. 

ALT_TAG

Managers

Simon Brazier

Groups

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.