Partner Insight: What's your edge in this recovery?

clock • 5 min read

Dr Niall O’Connor tells us what differentiates the Brooks Macdonald Defensive Capital Fund, which celebrated its 10th anniversary this year

What is the key goal of the fund?

We're a long-only fund trying to get strong, reasonably predictable risk-adjusted returns over a three-year time horizon. A lot of our peers in the absolute return space - e.g., ‘long-short' or ‘relative value' funds - have good then bad years, with the only excuse being that they made wrong bets. For investors, they become an unpredictable black box.

By contrast our long-only fund has, largely speaking, been pretty predictable across our 10-year history. But as a long-only fund, we are inevitably somewhat impacted by drawdowns in equity and other asset markets - and we've done better in stronger years.

What mix of assets do you own?

Things like structured notes, mainly institutional autocalls; convertibles; and then UK listed investment trusts or investment companies in a number of different sub-segments including areas such as music rights. It's easier to say what we don't do. We don't really invest in plain vanilla corporate or government bonds; and we're not investing in tech stocks.

What drives that asset selection?

In part, diversification. Most of the time that strategy works though in March, when most assets went down, diversification benefits were reduced. The other driver is that we prefer assets that others are not looking at, particularly in the midcap space. Mid-cap companies might not have much - or any - broker coverage. We get an edge by knowing more about these companies and securities than most other people do.

That edge is also important with regard to underlying assets. For example, a lot of people think if you buy a music right, you make money for 30 years. But songs are not an annuity stream. Many make a lot of money in their first year, a smaller amount in the second, and go down from there - the decay rate is high so you have to be careful.

You were a banks analyst in the last crisis: what lessons have you learned overall?

The obvious ones are ‘Don't panic' and ‘Be a contrarian' - in particular, be a buyer when everybody else has finally decided to sell. But I'm also slowly learning the converse: that you can be right factually but wrong on the markets. If everybody else thinks you're wrong, you can still end up being wrong.

My PhD in physics also taught me a lot. Physics is all about taking a complicated situation, distilling it down to key elements and coming up with a mathematical model to explore sensitivities and so on. The modelling expertise is useful for derivatives; and binary decision trees can be very useful to assess the epidemiological crisis and Brexit, for instance.

Click here to read more on Dr Niall O'Connor's outlook across a range of asset classes

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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