Thinking he was the luckiest man in the world when he got the opportunity at the beginning of 2000 to manage a fund that was in the hottest sector at the time – technology – Adrian Brass soon had a wake-up call.
By the end of that year, the index he followed for the global technology fund he was running at Investec Asset Management had halved in value.
“It was a real baptism by fire and it was a phenomenal learning experience to start off as a fund manager investing at a time when you were going through an unsustainable amount of hype, crazily high valuations and expectations.
“I would say it was a very formative experience for me and probably has been one of the reasons why I am extremely valuation focused. Valuation is throughout the heart of my process and half of what I am looking for in every investment that I make.”
Brass went straight into fund management from university and he has since clocked up 18 years in the business, from a five-year stint as a European sector analyst at Schroder Asset Management, then time at Investec where he latterly was a global diversified fund manager, and after that over to Fidelity seven years ago.
Initially he was a global consumer fund manager and a year later the move across to specialise in the America sector.
Fidelity is an American firm, but Brass is based with Fidelity Worldwide Investment in London, which he says is an excellent base.
“America is an extremely big place so to fly from here to New York takes pretty much the same time as it takes to fly from New York to San Francisco.”
Live from London
London’s hub status also means meetings with company management teams as they pass through London, or the team sets its own agenda which can involve flying over to see them.
“I still get to have more than 150 meetings a year with companies and we have 17 analysts who are probably doing at least as many meetings as me, either on the phone or face-to-face in London or when we fly over to the states.”
Added to this, he points out that he is not distracted by share prices movements until the end of his day.
The whole of Fidelity’s global investment team is in London, of which the US represents a hugely significant half of the benchmark, and Brass says he benefits from having real-time updates on what’s going on in Europe.
“Even with my global colleagues sitting next to me they are filling me in on what is happening in Asia and other parts of the world, and of course my American companies are extremely global in dimension. So my advantage in being part of this global team in London is that I’m able to do things from a holistic global perspective.”
By the end of this year Fidelity Worldwide Investment will become more of a distanced sister company to the firm’s Boston headquartered operation, which means he won’t be sharing or using the research analysts there.
This was planned around four years ago and, knowing that was going to happen, Brass was involved instrumentally in setting up its own US research team – the 17 analysts who sit next to him in London.
Previously, Brass would go the Boston office ever quarter and he would be on the phone to the analysts out there the whole time. But he was one of over 50 fund managers they were dealing with, whereas now he is just one of five US managers.
The management took the decision to build one of the biggest US research teams outside of America and that Fidelity should offer style products across the spectrum, from a contrarian manager right the way across to momentum growth.
Core values
Brass is officially a core manager along with two of the others but “philosophically I’m on the value side of core”.
His main fund is Luxembourg-registered Fidelity America and as a bottom-up stockpicker he is looking for share prices that are substantially undervalued but importantly have good risk rewards, so good downside protection to the share price.
The research analysis takes into account the industry environment (secular or cyclical changes), as well as factors specific to the companies. He favours companies with positive changes in fundamentals, such as revenue growth or improving margins and also companies with healthy balance sheets and strong free cash flow.
A key risk management feature he is focusing on is the volatility of the fund and its overall beta.
“Because of my concerns over the market in the short term, I ensure my beta has been around one. That’s been my policy over the past two years. Before two years ago, beta would be between 0.85 and 1.15 depending on where I was seeing the strong incremental views coming up.
“One suggests I’m OK with the market. Short term there could be some wobbles but in the next 12 months I think the market is going to go up.”
Sector picks
From a sector perspective, Brass is very overweight in healthcare and to a slightly lesser extent in technology with heavily underweight positions in utilities, telecoms and industrials and materials.
In the case of healthcare, for two years he has seen the sector as full of great quality companies with excellent franchises trading at very attractive valuations, and statistically extremely cheap versus the other sectors.
His latest healthcare purchase is Mylan, a pharmaceutical manufacturing company which is trading cheaply at 10 times earnings and with a pipeline of opportunities because of existing branded drugs it is challenging in patent rulings.
“There are some really big ones so if they are successful it will be quite material for Mylan’s growth in the future. We don’t think you are paying up for any of those in the valuation.”
Concerns for an existing, branded drug in its stable that is going off patent in a few years is countered by Brass’s view that there may be ways they can offset that patent expiry.
“I can value the existing products and because you have patents you can often value with a degree of confidence. And if I can get free optionality on potential new drugs in the pipeline then I get very excited.”
Within technology, the latest big purchase is Oracle, which has disappointed with profits over the past few quarters.
“People fear that Oracle is facing secular growth challenges. Our belief is that Oracle has a dominant position in data bases and is extremely entrenched with its customers. We are also encouraged that they are coming out with a new online database. They only need to add a little bit of growth and it will get re-rated strongly.”
The US market is regarded as so well researched that some financial advisers, such as BestInvest, choose an ishares ETF to get exposure because they cannot see how fund managers can add value.
Looking ahead
In answer, Brass accepts the majority of fund managers do underperform the US market with big companies having up to 50 analysts broadcasting their views and fund managers often having a very short-term focus and pressure to deliver short-term performance.
“An investor needs to look at the subset of fund managers who have strong long-term records, and there are some. And with those fund managers, you can get long-term outperformance not just from the peer group but the market as well.”
His fund compares well with his peer group on a three-year view and he says he is also a little ahead of the market.
“I always say to people look at the longer term or even different time periods and if you looked at me on a one, two, four or five-year basis, you would have generated a lot more outperformance versus the index on a net basis.”
As for the outlook Brass says the current market multiple is fair and the market’s performance comes from earnings growth.
“And since I’m happy with let’s say a 7% or 8% earnings growth number that’s what I think the market can do over the next 12 months.”
