Concerns about the health of markets heading into the coronavirus pandemic helped protect Simon Brazier’s Investec UK Alpha fund and has now prompted the manager to make several changes to the portfolio.
Brazier (pictured), who is co-head of quality at Ninety One Asset Management – formerly known as Investec Asset Management – said that he had been warning investors in the £1.9bn Investec UK Alpha fund about the possibility of an external shock to markets. 
He explained: “We certainly didn’t predict the coronavirus, but we have been saying to our clients for over three years now that we were worried about slowing top-line growth, the fact that margin growth was very limited – if not margin pressure – and that valuations were very full.
“You would find it quite difficult to find opportunities to buy companies at attractive valuations over the long term.”
As such, the construction of the portfolio has reflected this with the number of stocks in the portfolio falling from around 90 in 2013 to just under 50 as opportunities have dried up.
In addition, over the past three years the amount held in FTSE 100 stocks has risen from 60-65 per cent of the portfolio to 83-85 per cent. This, said the manager, has come as cyclicality in the portfolio has been removed by moving out of sectors such as industrials, leisure, retail and housebuilders into more globally diversified, cash-generative and defensive businesses.
“What we have been warning our clients for the past three years is that we felt there was a significant potential for liquidity, currency and economic risk going forward,” he explained. “There were exogenous risks that could have been the catalyst – obviously coronavirus wasn’t one of them – but we felt that any shock to the system would be difficult.”
And when the coronavirus hit, the fund’s focus on less economically sensitive areas helped it weather some of the worst of the market sell-off.
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Year-to-date (to 6 April), the Investec UK Alpha has made a loss of 21.69 per cent faring better than the FTSE All Share index (which is down by 26.47 per cent) and the average IA UK All Companies peer (which has lost 29.34 per cent).
“The fund was fully invested so you can’t escape the direction of the markets,” said Brazier. “Having said that we performed relatively well in this environment.”
Since the spread of coronavirus, Brazier has been making a number of changes to the portfolio to adapt to the new market paradigm.
The first change to the portfolio and one that marks a departure from his previous stance was to move to a neutral position in the oil & gas sector.
While the oil price war helped to kick-start the March market sell-offs, a resolution between its Russian and Saudi Arabian protagonists now seems in the offing and that positioning seems prudent, particularly for companies that have already endured a lot of belt-tightening as a result of low prices in recent years.
“I’ve always been underweight oil & gas, but it’s an area of the market which is obviously a significant part of the UK market,” he said. “And we felt that at the current valuations [that] we’ve got from the oil price, but also from companies that have ample liquidity on their balance sheets and the ability to generate cash through either disposals or reductions in capex [capital expenditure], mean that they are well-placed at least and they’re coming off a base of very low oil prices which are quite politically based.”
Performance of FTSE UK Oil & Gas vs FTSE All Share over 1mth
Source: FE Analytics
Another change to the portfolio is the addition of quality companies that have been dumped in the coronavirus sell-off, such as InterContinental Hotels Group and Ryanair.
“We’ve added to these levels because we’re now pricing in quite a negative outcome scenario that if it were to see any resolution in the next six-to-12 months and travel were to pick up again, we would be well-placed,” he said.
As well as coronavirus-struck stocks, Brazier has been adding to quality names that have now become more affordable from a valuation perspective such as investment platform Hargreaves Lansdown and media company Ascential.
Finally, the manager has been making some ‘relative value’ trades within the fund taking companies such as Unilever, Imperial Brands, British American Tobacco and Tesco that have performed well in the sell-off to their original positions in the portfolio.
“We had to take – effectively – the relative profits off the table and then reinvest into some of the names that we own that have underperformed or that we feel are long-term players,” he explained. “For example, Experian is one of those very good long-term businesses and where there’s been an opportunity to recycle capital into.”
Ultimately, Brazier said he remains focused on companies that can grow their profits in a consistent way throughout the cycle, that are diversified, and are cash generative.
Nevertheless, the manager will continue to take opportunities where he finds them – particularly as markets have been pricing-in particularly negative scenarios – because he has been unable to for so long.
“The whole aim has been to buy low and sell high and the whole problem for the last two or three years is they’ve only been given the opportunity to buy high,” he explained.
However, the ‘great unknown’ is the coronavirus and markets will likely remain volatile until either testing takes place on a greater scale than at present or a vaccine is developed.
“There will be a day – and this is the first time in my career of 22 years – where I’m not relying on central banks and actually relying on scientists to provide a floor to the market and, therefore, a recovery,” said Brazier.
“That to me is going to be when the market recovers – as the science comes through – and provides comfort rather than the Fed pumping another $1trn of QE because that helps Wall Street, I’m not sure it’s helping Main Street yet.”
Since Brazier began managing Investec UK Alpha in January 2015 to the peak of markets on 19 February, it had returned 43.98 per cent against a 44.23 per cent gain for the FTSE All Share benchmark and a 43.71 per cent return for the average IA UK All Companies peer.
Since 19 February, however, the fund has outperformed both its peers and benchmark making a loss of 21.89 per cent, compared with losses of 26 per cent and 29.03 per cent for the benchmark and IA UK All Companies average.
Performance of fund vs sector & benchmark under Brazier
Source: FE Analytics
Investec UK Alpha has an ongoing charges figure (OCF) of 0.82 per cent.