The fall of Woodford Investment Management was not the end of the liquidity crisis in the UK market, according to Investec's Simon Brazier, who says any type of shock that causes a spike in outflows could quickly bring matters to a head
.
Woodford Equity Income's suspension and wind-up brought liquidity concerns to the fore, leading numerous equity funds to issue statements reassuring investors they are not suffering from similar problems.
Yet Brazier (pictured), who runs the Investec UK Alpha fund, said that his concerns about liquidity predate the Woodford blow-up by 18 months and that despite the recent panic, many fund managers are underestimating the scale of the problem.
“I would argue that the Woodford thing is not the conclusion of this,” he said. “I can spend hours talking about liquidity in terms of funding, the Bank of England, QE, all that sort of stuff. But just as a market participant, I’m telling you that liquidity in equity markets – particularly the one I work in – is very, very tricky.”
Brazier is especially concerned about the amount of investors’ money that has found its way in to mid- and small-cap equities over the past 10 years. And while these have obviously done well – the FTSE 250 and FTSE Small Cap indices have made 196.49 and 167.57 per cent over the past decade, compared with gains of 109.72 per cent from the FTSE All Share – he has begun to notice crowding in certain names.
Performance of indices over 10yrs
Source: FE Analytics
“I’m currently at 83 per cent in the FTSE 100 or equivalent and I don’t own any small caps, because I do worry about liquidity risk,” he continued.
“I also joke at work that if I asked some of the youngsters on my team, ‘what does it mean to have a liquidity premium?’ They will probably tell me that you should pay up for smaller stocks because they’ve got higher growth potential. Whereas, obviously, people like me were taught once upon a time you paid a smaller valuation for smaller stocks because of the liquidity risk.”
Brazier said he has already been able to take advantage of poor liquidity in other funds. For example, he bought shares in identity verification business GB Group in February when it conducted a share placing to take over US company IDology.
The manager became interested in the stock after its share price fell from about £6 to £4, even though the underlying business remained in good shape. Yet he said that while many of his peers may have come to the same conclusion, in a lot of cases their hands were tied.
“The reason why we got the stock as a non-shareholder, £35m of a £160m placing, was because its other shareholders were seeing outflows and were unable to put the money up, despite the fact the shares had just come down 40 per cent.
“So, we bought that stock at £4.10. It is a brilliant business, its recent results were very good and shares are around £7.15 today.”
Performance of stock year-to-date
Source: FE Analytics
Liquidity is not Brazier’s only concern at the moment. He is also worried about currency risk, saying he does not think the election outcome is as cut and dried as the opinion polls suggest, which is why he is trying to ensure his portfolio is not exposed to a sharp shift in sterling one way or the other.
Even if the Conservatives were to win a majority, the manager is sceptical of a ‘Boris bounce’ in the UK market, claiming in a previous Trustnet article that the prime minister’s proposed withdrawal agreement with the EU would only constitute 1 per cent of the Brexit process.
He said this is a major concern with the UK economy in such a precarious position.
“I personally believe the range of economic GDP outcomes in the UK over the next 12 to 18 months could be +1 per cent to -5 per cent, quite easily,” Brazier added.
“The savings ratio today, excluding pension contributions, is pretty much zero. It reminds me so much of 2008 where we experienced a 6.4 per cent drop in GDP. Around 4 to 5 per cent of that fall was the result of a reduction in consumer spending, as the savings ratio at that time went from about 1 per cent to 7 per cent.”
“I worry about that quite a lot actually,” he finished.
Data from FE Analytics shows Investec UK Alpha has made 36.57 per cent since Brazier took charge in January 2015, compared with gains of 37.18 per cent from the FTSE All Share and 36.32 per cent from the IA UK All Companies sector.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
The £2.3bn fund has ongoing charges of 0.82 per cent.