Partner Insight: Turbulent times - How defensive are you feeling?

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Partner Insight: Turbulent times - How defensive are you feeling?

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

Important information

All data provided by Brooks Macdonald, unless otherwise stated, as at 31.08.20. The information presented in this document, including charges and performance, is for Sterling Class A Shares. Other share classes may be available. This document is for professional investors only and is not to be used by or distributed to retail investors. Structured products are complex investments which may not be suitable for all investors.

The price of investments and the income from them can go down as well as up and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not a reliable indicator of future results. Changes in rates of exchange may have an adverse effect on the value of an investment. Changes in interest rates may impact the value of fixed interest investments within the fund. The value of your investment may be impacted if the issuers of underlying fixed interest holdings default, or market perception of their credit risk changes. There are additional risks associated with investments in emerging or developing markets.

This document and the information contained herein is confidential and has been prepared and is intended for use on a confidential basis solely by licensed financial advisers. It may not be reproduced, redistributed or passed on to any other persons or published in whole or in part for any purpose. The funds to which this document refers are not registered for distribution to retail investors outside the United Kingdom. This document does not constitute an offer or invitation to the public to subscribe for or purchase any interest and accordingly no facilities for participation by the public are being made available pursuant to this document. Nothing in this document implies any representation, recommendation or advice (including investment advice) of any kind by Brooks Macdonald Asset Management Limited, its management, employees or affiliates with respect to its content and you should not make any investment decisions on the basis of it.

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Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Group plc is registered in England No 4402058. Registered office: 21 Lombard Street London EC3V 9AH. All services, unless otherwise stated, provided by Brooks Macdonald Asset Management Limited. Brooks Macdonald Asset Management is authorised and regulated by the Financial Conduct Authority. Registered in England No 3417519. Registered office: 21 Lombard Street London EC3V 9AH.

More information about the Brooks Macdonald Group can be found at www. brooksmacdonald.com

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