Brooks Macdonald’s Dr Niall O’Connor explains his investment approach in what may prove a challenging recovery period
The Covid-inspired market plunge and bounce back underlines an age-old investing paradox. How can you dampen exposure to market falls while retaining exposure to recovery and long-term growth?
As the manager of Brooks Macdonald's Defensive Capital Fund, which celebrated its 10th anniversary at the height of the market crisis in March, Dr Niall O'Connor is focused on that problem. "We're capturing as much of the upside as we can while trying to protect to some degree on the downside," he says.
Defensive diversity
O'Connor's strategy relies on a diverse mix of global asset classes. "We're a long-only basket of convertibles, autocalls, investment companies and zero dividend preference shares," he says, with exposure to underlyings such as the US pharmaceuticals industry, music rights and specialist lending.
That diversification faced a sharp test in March, despite defensive positioning. "We missed some of the rally in December 2019 because we felt equity markets had run ahead of themselves, and were holding 13% cash - our highest cash level ever - with autocall holdings, which tend to have the most downside risk in our portfolio, running down to probably the lowest level on record," he says. "But as a long-only fund, it's really impossible to be positioned defensively enough when everything sells off," he says.
"At one point, we were down 20% year-to-date and UK equities were down 34% so we captured more downside than we'd have liked. It wasn't comfortable, but we were confident the recovery would be as brutal on the upside so we held our nerve around the market capitulation point of March 12th."
Bounce back
Since then the fund has enjoyed the market bounce with April the fund's best month ever, O'Connor says, "and as of early September we're ahead of our longer-term targets." Meanwhile, the fund's long-only stance should help keep its performance relatively transparent in a range of recovery scenarios, compared to some other absolute return funds.
The March volatility has prompted some soul searching. "I think we got the macro and epidemiology roughly right, but we didn't quite get right the degree of fear - the behavioural side," he says. "We might need to read the Daily Mail a bit more, and the FT a bit less!"
But he's not planning major changes to a strategy that has one of the longer performance track records in its sector. "While we have made the fund a bit more conservative, I think it's important we don't change our mandate for what is likely to prove a very rare event," he says.
Click here to learn more about Dr Niall O'Connor's outlook for the recovery period
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