An underweight position in mega-caps and certain stock specific disappointments have been the major factors behind the £1.6bn Old Mutual UK Alpha fund’s underperformance relative to the FTSE All Share in 2014, according to manager Richard Buxton, who warns that the fund and index could be stuck in a trading range early next year as well.
Buxton made the high profile move from Schroders to Old Mutual Global Investors last year to take up the position of head of UK equities and to manage the group’s UK Alpha fund, attracting around £1.3bn worth of assets as a result.
While Buxton captured the upside of last year’s bull market, 2014 has been a much more difficult environment for the highly-rated manager. According to FE Analytics, the fund has returned just 1.78 per cent year-to-date.
While that places the fund in the second quartile – as the IMA UK All Companies sector average has returned 1.12 per cent – the FTSE All Share is up 2.88 per cent over that time.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Though most active managers seemed to have been caught out by this year’s turbulent market – just 25 per cent of funds in the sector have beaten the index so far in 2014 – Buxton says he has been left disappointed by the performance of his portfolio.
“This has been a frustrating year both in terms of the market and in terms of the fund,” Buxton (pictured) said. “The market, as we know, has essentially gone sideways, all year; though it looks like we might end the year slightly on the positive side.”
“At the fund level, we have been slightly shy of the index pretty much all year and that is a function of not having some of those very large mega-cap stocks at the start of the year – for instance we only started to buy AstraZeneca later on in the year – and some stock disappointments like Tate & Lyle, Rolls Royce etc.”
“It’s just been a kind of neither here or there year, really.”
Performance of stocks in 2014
Source: FE Analytics
As the graph above shows, shares in AstraZeneca surged earlier in the year following a proposed buy-out by US pharma giant Pfizer. Tate & Lyle shares, on the other hand, have dropped considerably as a result of the company’s falling profits while Rolls Royce issued a profit warning last month, causing its shares to fall as well.
While he says there have been some company-specific problems for his fund, Buxton says the general problem has been the performance of the wider market.
Buxton has become renowned for his bullish comments on UK equities, stating last year that we were in the foothills of an extended structural bull market, and therefore his portfolio positioning hasn’t suited this year’s conditions.
“The problem has been that we have not had the earnings growth coming through in anyway like as strong a form as we had originally hoped and that was tied in with my hope that the market would break through the top of the trading range and breach the 7,000 magic number,” Buxton explained.
“The strength of sterling through to the middle of the year [has been a headwind]. Much like the childhood excuse of ‘the dog ate my homework’, sterling ate our earnings growth. There has been no fuel in the engines to push the market higher.”
While Buxton fully expects “Santa rally” in UK equities over the next month or so, he says investors shouldn’t expect the market – and by extension his fund – to tear ahead in the early months of 2015.
“With sterling at $1.55, that will absolutely begin to reverse. Whether we see that in the H2 results or not, we don’t know, but it should absolutely be the case,” he said.
“Of course, the other thing for the UK next year is the election in May. To some extent, even though a lot of global investors allocate to Europe including the UK – rather than by region or country basis – it’s difficult to see huge allocations to the UK equity market in the six months running up to the election with the uncertainty which prevails about the outcome.”
“It could well be that even if we do have weaker sterling and the benefits of that coming through for corporate earnings, we will still stuck in this trading range throughout the first half of the year until we know who is forming the next government.”
However, that’s not to say the manager is bearish on UK equities as he is keeping a relatively risk-on portfolio.
“If it is like I think it will be, a continuation of where we are now with a conservative Lib Dem coalition, then it could be that mid-year we finally take the handbrake off and have a much stronger second half of the year.”
“It could really be one of those years like the old cliché: ‘a game of two halves’.”
While Buxton’s focus on value has meant his funds have tended to underperform in weaker market conditions, it has meant he has considerably outperformed over the longer term.
According to FE Analytics, his Schroder UK Alpha Plus was the sixth best performing fund in the sector when he was at the helm between June 2002 and May 2013. It returned 242.66 per cent over the period, beating the FTSE All Share by more than 110 percentage points.
While he officially moved to Old Mutual in June last year, he has managed the UK Alpha fund since December 2009. It has been a top quartile performer over that time with returns of 83.95 per cent while the FTSE All Share has gained 57.33 per cent.
Performance of fund vs sector and index since Dec 2009
Source: FE Analytics
The fund is clearly set-up for a rising market as Buxton has a high weighting to more economically sensitive large-cap stocks.
He counts the likes of HSBC, Barclays, Lloyds, International Consolidated Airlines, Rio Tinto and Glencore as top 10 holdings which, combined, make up roughly a quarter of his fund’s total assets under management.
Old Mutual UK Alpha has an ongoing charges figure of 0.78 per cent and has a small yield of 2.75 per cent.
