The manager of the £1.8bn Old Mutual UK Alpha fund is also expecting markets to experience greater volatility over the next few months as UK voters build up to the 7 May general election, in which most polls suggest a tight run-off between Labour and Conservatives with UKIP, the Liberal Democrats and even the SNP all touted as potential kingmakers.
Buxton says “wild gyrations” in bond and equity markets since the start of year have surprised investors and fund managers but warns that this only set to continue in the months ahead.
“It has been an extraordinary start to the year and I expect we will face more of it in the next few months of the year,” Buxton says.
“It is going to persist for several more months and is going to be very rocky and very volatile. Volumes in the markets are still low and there is a lot of pencil sucking among the major institutions with no one doing very much at the moment. Electoral uncertainty is clearly not helpful to corporate competence, investment and planning.”
“We have a bit of a hiatus for at least half of the year and we are probably stuck with more volatile oscillating [markets] until we have got past the election and have a new coalition formed and we can start to see some broadening and strengthening of profits growth.”
UK bonds and gilts have seen opposing performances in the first few week of the year with both gilts and corporate bonds up more than 2 per cent and the FTSE All Share down more than 2 per cent.
Performance of indices in 2015
Source: FE Analytics
Buxton’s bearish view is heavily in contrast to his sentiment a year ago when he was expecting a prolonged bull run in UK equities that would see the FTSE 100 smash through the psychologically important barrier of 7,000 points in 2014.
However, with the index mostly flat over the past year and currently trading around 6,300 points, Buxton had a difficult year in 2014 ending it second quartile with returns of 1.24 per cent, only just ahead of the FTSE All Share’s gain of 1.18 per cent.
Performance of fund, sector and index in 2014
Source: FE Analytics
Buxton made the high profile move from Schroders to Old Mutual Global Investors in 2013 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.
He recently told FE Trustnet why the fund had seen a bad year, blaming an underweight position in mega-caps and certain stock specific disappointments.
He said: “This has been a frustrating year both in terms of the market and in terms of the fund. 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.”
His disappointing performance has not, however, stopped inflows and the fund now stands 75 per cent higher than at the beginning of the year with assets over £1.8bn.
Fund size over 1yr
Source: FE Analytics
While Buxton expects the low oil price to continue to hamper performance, he says it will benefit markets over the medium term, a period over which he says his fund’s returns will be much higher.
“The fact is the developing world is slowing, the US is the global growth engine. However, the benefits to the world from low oil price will be a net benefit.”
However, while he has recently sold out of BP because of the falling oil price, he is still positive on Royal Dutch Shell, which makes up more than 4 cent of the fund.
“In a tough environment these are the companies with the least material upside in the short term. However, all of the oil majors will pay their dividends out of their balance sheets. I am extremely confident Royal Dutch Shell will not miss their dividend, they haven’t cut it since the war, but unfortunately I can’t say the same for BP, which is why I don’t hold it,” he said.
He is also eyeing up beleaguered retailer Tesco, which was one of last year’s worst performers in the FTSE 100.
“Tesco is looking increasingly interesting with a lot of change in the industry going on. It was a sector to avoid for the past several years and it is going to be tough for some time but we are doing a lot of work in this space.”