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How Threadneedle’s Brazier will reinvigorate UK Select Trust
by Sarah Miloudi on Oct 05, 2012 at 07:01
Within three years Threadneedle’s UK equities head Simon Brazier hopes to have more than tripled the size of UK Select Trust, after taking over the mandate from Scottish Widows Investment Partnership (Swip) earlier this year.
At the core of this ambition is a planned transformation of the underperforming closed-end fund into a vehicle held in the same esteem by investors as his open-ended Threadneedle UK fund is.
The £30 million UK Select is the asset manager’s first investment trust mandate, and Citywire A-rated Brazier has vowed to turn round the performance of the laggard vehicle.
After being appointed the trust’s manager at the end of July, Brazier told Wealth Manager the plan to align it with Threadneedle’s higher alpha strategy was almost immediately set in motion, with Swip realising the less liquid positions that accounted for 20% of the fund.
Since the handover, Brazier effectively hit ‘control alt delete’ on the trust’s portfolio, which for the last three years underperformed the FTSE All Share Index, returning 6.86% net asset value (NAV) growth versus a 27.9% rise by its benchmark.
‘I did a programme trade in the first hour of receiving the portfolio to make it exactly the same as the UK fund,’ Brazier explained, adding that bigger, off-benchmark names were trimmed, while the portfolio was broadened from roughly 38 to 70 stocks, diversified by sector and not exposed to any single theme, with an underweight in banks and miners.
In keeping with his £1.1 billion open-end fund, Brazier established a fairly sizeable overweight position in housebuilders, believing names such as Persimmon offer similar characteristics to domestic lenders and share the same cyclicality, but offer investors far sturdier balance sheets.
Gearing and discount
Brazier also hopes to make use of the trust’s ability to gear – a key advantage over his open-ended fund – and expects to use this selectively to buy additional large caps with yields that will help fund the borrowing. This will also provide some protection against market falls because more volatile mid cap stocks will not be grossed up.
As well as growing the trust’s assets, Brazier also wants to narrow the vehicle’s 11.2% discount. Performance will play a key role in this, as well as in raising the trust’s liquidity, but the board has also stepped in and bought back shares. While still wide, that has come in from 19% in the last year.