Shaking up UK Select

Mr Brazier got stuck into shaking up UK Select without delay, realigning the portfolio more or less within 24 hours of Threadneedle formally assuming management. "We undertook a programme trade where you sell a number of stocks in one go to a counterparty," he says. "Doing it this way has helped keep the costs of the realignment minimal."

Some adjustments were also made before the formal handover at the end of July, when former manager SWIP realised less liquid stocks comprising approximately 20 per cent of the portfolio, and used the cash to purchase more liquid shares, generally FTSE 250 ones, that were both favoured by SWIP and consistent with Threadneedle's strategy.

The portfolio now closely resembles that of the open-ended Threadneedle UK Fund, which has been among the top 25 per cent of performers in the UK All Companies fund sector over the past few years. Mr Brazier will attempt to turn around UK Select using the same investment approach he uses with this open-ended fund. He invests across the market-cap spectrum, but with at least 50 per cent of assets in the FTSE 100 and no more than 10 per cent in smaller companies.

He is also raising the number of holdings to between 50 and 90 shares, in contrast to before the handover when the trust only held around 38.

"We should be able to deliver high alpha and low volatility," says Mr Brazier. "We aim to do this by diversifying growth drivers, a key factor in portfolio construction. We also want to diversify the trust by investment theme, style and market capitalisation so that the trust is never a one-way bet on any of these factors."

Although a clear understanding of the macroeconomic and thematic background is a vital starting point for building the portfolio, he says their ability to find companies really makes the difference, so that around 75 per cent of outperformance comes from stock selection.

Valuations are a key consideration, and Mr Brazier and his team seek companies that trade on attractive valuations relative to peers and history. "For example, in August 2010 we were negative on the economy but the valuations of housebuilders were cheap, and Persimmon has nearly doubled since then. Our view on the economy hasn't changed, but whereas before we were able to find cheap growth companies, this year defensives such as British American Tobacco, Unilever and Compass are on pretty good valuations."

Another aspect of Mr Brazier's investment strategy is a focus on business risk, and this rather than index weight helps determine position size in the portfolio. The trust's benchmark is the FTSE All-Share.

An example of this is his holding in ITE, a Russia-focused exhibitions company that is one of the smaller constituents of the FTSE 250. "This has the biggest potential upside of most of our holdings, cash on the balance sheet and good management," he says.

Other shares he believes have the ability to grow and add value, even if they are not among the trust's largest holdings, include Booker Group, Melrose and Johnson Matthey.

Read more about how Mr Brazier selects shares

IT differences

A key difference between an open-ended fund, such as a unit trust, and an investment trust is the ability of the latter to take on debt to buy investments, known as gearing.

"UK Select can gear, but its facility runs out at the end of September," says Mr Brazier. "However, historically this trust has had such a facility in place and I would not anticipate this changing. I would be interested in using gearing because the long-term prospects for UK equities are very attractive. And many dividend yields are higher than 4 per cent, while you can borrow money more cheaply."

Mr Brazier has never lead-managed an investment trust before, but gained experience of running a closed-ended fund while at Schroders where he worked closely with Richard Buxton, who manages Schroder UK Growth Fund.

Read our interview with Mr Buxton

Mr Brazier also feels that his management style is naturally suited to an investment trust. "My open-ended fund has always been invested like an investment trust because it takes a long-term approach," he says. "Turnover is low - around 20 per cent - because I typically hold investments for about four to five years. I take a long-term view on what a share is worth, for example I bought Standard Chartered after its short-term crisis, and I bought Tesco after its problems. UK Select won't be exactly the same as my open-ended fund but it will reflect and deliver what I have done with my existing strategy."

Mr Brazier's aims for the trust include growing the assets, as at the moment its holdings are worth less than £30m. "This trust is sub-scale but with our strong record we hope to rectify this - our strategy has grown assets significantly over the past two years," he says. "Over the medium term - three years - we would like it to have a net asset value (NAV) of about £100m. This will enable us to access clients who would not look at an investment trust under that size."

The trust may also do a secondary share placing to bring in new investors and increase the size.

He expects a policy to be introduced to help control the trust's discount to NAV, currently more than 14 per cent. But he adds: "Ultimately whether or not there is a mechanism in place, what brings the share price closer to NAV is a long-term sustainable record."