The sectors have had a torrid 2014 for various secular and cyclical reasons. Tesco, Morrisons and Barclays in particular have done badly and are amongst the worst performers in the FTSE 100 year to date.Buxton, who runs the £1.4bn Old Mutual UK Alpha fund, is one of the UK’s most highly rated contrarian stockpickers. He invests in a high-conviction portfolio of 35 stocks – predominantly large caps – which he believes are unfairly cheap.
In order to maintain a value focus, he tends to add to existing holdings that have recently underperformed relative to others that have had a better run.
A case in point is the fund’s sixth largest holding GlaxoSmithKline which fell almost nine per cent recently following lower than expected profits.
Performance of stock and index over 1 month
Source: FE Analytics
“We do it a little bit tactically and strip out 10 of the 35 names that have performed very strongly recently and add to the rest; it is an ongoing process,” he explained.
The manager is bullish on the UK equity market over the medium term despite headwinds such as a strong pound, the removal of quantitative easing and rising interest rates. He is positioning his portfolio in pro-cyclical and pro-financial stocks, which have had a tougher time of late.
Here we take a look at the stocks Buxton has been adding to, and a couple he is looking at more closely.
Banks
UK banks make up Buxton’s largest sector bet at around 12 per cent. HSBC, Lloyds and Barclays are Old Mutual UK Alpha’s first, third and fourth largest holdings, and financials as a whole make up just over a third of the fund.
The three banks are some of the most afflicted stocks of the plummeting markets of the financial crisis and are yet to recover their pre-crisis highs.
Performance of stocks and index over 8yrs
Source: FE Analytics
Whilst Barclays and Lloyds have recovered from the post crisis lows, this year has seen all three stocks lose money.
Barclays in particular has suffered and is currently down 18.36 per cent in 2014.
Performance of stocks and index in 2014
Source: FE Analytics
However Buxton says he is optimistic the banks could see a significant re-rating and is therefore “very committed” to holding their shares, seeing the recent soft-patch as a buying opportunity.
“The market continues to worry about further tightening of capital requirements, fines from the US, investigations and Labour pledges to create more challenger banks – these are all putting investors off the sector,” he said.
“However with their current level, there is significant scope for re-rating if people get assurance on some of those issues.”
House builders
House building stocks have been amongst the prime beneficiaries of improving economic sentiment and government policies such as ‘Help to Buy’ over the past few years.
However they have suffered in 2014, with the market preferring less economically sensitive companies in light of soon-to-be rising interest rates, and worries over over-heating in the UK housing market.
Taylor Wimpey, for example – the only FTSE 250 stock in Buxton’s top-10 – has seen a huge re-rating since the depths of the financial crisis of over 2,500 per cent.
In 2014 it is up 3.56 per cent but has been on a downward trend since February, losing more than 11 per cent.
Performance of stock and index over 6yrs
Source: FE Analytics
Buxton says that worries over rising interest rates have been over-the-top, as it’s highly unlikely that the Bank of England will return to pre-crisis levels for the foreseeable future.
“I’m not inclined to sell out of stocks such as Taylor Wimpey because although they have been going sideways for a year in a volatile fashion, I’m confident as interest rates do nudge up in the UK it will be incredibly slow and gentle,” he said.
“The Bank of England will watch and wait after every move in rates to see how it affects the economy and housing markets.”
“Also, I am confident that the delivery of profit growth and returns back to shareholders from Taylor Wimpey makes it perfectly worthwhile to continue to hold.”
Supermarkets
The likes of Morrisons and Tesco are amongst the most contentious UK large caps at the moment.
A year of earnings downgrades has plagued share prices, with the ongoing loss of market share to Aldi and Lidl proving particularly costly.
The growth of online shopping has been a further headwind to Morrisons, which has been slower than its competitors to offer the service.
It does have a tie-up with Ocado to launch an online offering in the near future, though.
Morrisons is the worst performer in the FTSE 100 this year, losing 31.42 per cent while Tesco and Sainsbury’s are down 16.5 and 8.85 per cent, respectively.
Performance of stocks and index in 2014
Source: FE Analytics
Buxton says he is becoming increasingly interested in the stocks following their sharp de-ratings.
“We continue to kick the tyres on the sector and clearly the news is getting better with the new management at Tesco. At the moment there are headwinds that make it not quite the time to press the button,” he said.
