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Partner Insight: Digging deep for recovery

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Dr Niall O’Connor explains why he is looking beneath the surface of what may be a gradual economic rebound

As the manager of Brooks Macdonald's Defensive Capital Fund, which celebrated its 10th anniversary this year, Dr Niall O'Connor is used to developing a view across a range of asset types. He thinks that the damage to business models and the continuing threat of the virus means economic recovery might look like the Nike ‘swoosh' symbol - rapid descent with a very gradual recovery like that now emerging in China, as fear slowly ebbs away.

Defaults may remain surprisingly low, relative to the 2008 global financial crisis, due to government and central bank support, he says, but the equity market recovery looks fragile.  "Retail investors have extra money in their pockets because there's been nowhere to spend it and no sports to bet on," he says, "so investing in stock markets has become a bit of a game - for instance, buying leveraged call options in stocks at all-time highs."

He points to similarities between now and 1999, before the dot com bubble burst, "including tech companies spending money to gain market share and high stock price dispersion."

Stressing students

He's not too worried about the frothiness in relation to the fund, because he does not invest directly in tech giants: "we tend to be more a value-oriented fund." But he thinks investing may face a turning point.

 "Investors haven't yet got the message that you can't really get ‘safe' yield anymore," he says. "Everyone thinks UK equity dividends will be low this year and next year back to 4-5%. But dividend futures are suggesting sub 3% in 2025."

While equity upside remains important to consider, he thinks "there are still a lot of convertibles where you can get both equity optionality and decent yield."

 If safe yield is out, he thinks stress-tested yield can be found in some lending funds and real estate investment trusts (REITs).  "Things like student accommodation REITs, where stocks sold off very heavily. Even on a stressed basis you may be able to expect yields of up to 5%, for example, after haircutting the rents they're receiving at the moment," he says. He avoids retail REITs - everyone is shopping online - but wonders if office REITs also sold off too sharply. After the threat of Covid-19 eventually recedes, "there will be more home working than before but the office, as a melting pot of ideas and collaboration, is far from dead."

Macro moments

That kind of macro call is important because at critical points, "stock picks are pointless unless you've got the macro direction roughly right," says O'Connor. But most of the time, his fund is "very much a bottom-up construction with a top-down overview."

 The team started serious stock picking again in May, "earlier than other people due to some interesting market anomalies," as investors deserted whole sectors without reference to the strong positioning of specific stocks. He says the post-Covid market is driven by overarching stories - ‘Amazon good, lending bad' - whereas "we like to dig beneath the surface and invest in places others have given up."

Click here to learn more about Dr Niall O'Connor's strategy 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.

Investment Fund Services Limited (IFSL) is the Authorised Corporate Director for the IFSL Brooks Macdonald Fund. IFSL is registered in England No. 06110770 and is authorised and regulated by the Financial Conduct Authority. Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Copies of the Prospectus and Key Investor Information Documents are available from www.ifslfunds.com or can be requested as a paper copy by calling 0808 178 9321 or writing to IFSL, Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP.

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

Additional notice for Singapore: This document is not a prospectus, as defined in the Securities and Futures Act, and the funds to which this document refers are not registered for distribution to retail investors.

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