Ladbrokes, Drax and Tesco are some of the most anti-consensus stocks in the Old Mutual UK Alpha fund, according to Richard Buxton, who says they should make piles of cash for those willing to hold them over the longer term.
Buxton (pictured), who has managed the £2.1bn Old Mutual UK Alpha fund for more than four years, has struck a more measured tone on his expectations for UK equities in 2015 compared to his bullish outlook in recent years.
However, he says some excellent value plays can still be found in the current market. In the following article, we put some of them under the spotlight.
Ladbrokes
Old Mutual Global Investors’ head of UK equities says Ladbrokes is one of the cheapest and most unloved stocks in his portfolio.
According to FE Analytics, the national chain of bookmakers saw a rapid re-rating in the post financial crisis era until about two years ago, when over the following 18 months or so it plunged more than 50 per cent in value.
Performance of stock and index over 3yrs
Source: FE Analytics
Regulatory and tax pressures have prompted Ladbrokes to shut 150 shops in the past year after the 2014 Budget hit bookmakers with a rise in machine games duty from 20 to 25 per cent. Fixed odds gambling machines are currently an important chunk of Ladbrokes’ revenues. Recent results showed profits are down 22 per cent compared with a year ago.
“Another set of new managers is trying to improve their relative position in an industry that still faces quite a lot of structural headwinds and challenges,” Buxton said.
However he says at its current price the firm is fairly priced and is starting to make headway – being up about 20 per cent in a month.
Drax
Yorkshire-based power generator Drax is Buxton’s next pick. It has also been hit by legislation over the past year, in this case the potential removal of subsidies for biomass.
Performance of stock and index over 1yr
Source: FE Analytics
“It is a controversial holding: they are gradually moving themselves from purely coal to part coal part biomass. Clearly they have been impacted by the fall in the oil price because that has affected electricity prices but over the next five years we are going to make a lot of money out that investment,” Buxton said.
The stock’s tough recent past hit a number of high-profile funds including Invesco Perpetual Income and Invesco Perpetual High Income - managed by FE Alpha Manager Mark Barnett. The manager said it had been a major detractor to performance over the past year.
Tesco
Last up is the beleaguered supermarket, whose fall from grace surprised even the likes of Warren Buffett who had held the stock as a major position in Berkshire Hathaway’s highly successful portfolio.
However, Buxton says while the rise of discount food retailers such as Lidl and Aldi may bode ill for the ‘big four’ supermarkets, the worst of Tesco’s losses seem to be behind it since the appointment of new boss Dave Lewis who took over in September 2014 after a career at Unilever.
Buxton says it is hard to know how quickly the big supermarkets will counter the encroachment of the discounters onto their traditional market share but that Tesco should be better placed than any other firm.
“It is the only stock I have bought this year, having sold it five years ago after seven years of owning it, sadly fearing that the industry was going to get a whole lot tougher and that their whole venture in the US was heading of in the wrong direction,” he explained.
“It has been a bit of a horror story for the company since then but we met the new chief executive at the beginning of the year and although the industry is still very tough and this is going to be a multi-year journey, the fact is they are still by far the largest and that does give them a competitive advantage. I think over time we will reap the benefit of that.”
Buxton made a high-profile move from Schroders to Old Mutual Global Investors in 2013 to become head of UK equities and run the Old Mutual UK Alpha fund, in the process attracting a whopping £1.3bn worth of investors’ cash.
Having previously run the fund as a separate mandate for several years while at Schroders, he has a track record on the fund going back to December 2009.
Since he has run Old Mutual UK Alpha it has returned 99.47 per cent to investors while the FTSE All Share has gained 68.15 per cent and the average fund in the IA UK All Companies sector made 79.95 per cent.
Performance of fund, sector and index since December 2009
Source: FE Analytics
It is top quartile over three years as well as since he took over the fund in 2009.
Banks remain Buxton’s biggest sector bet, with more than 12 per cent of his fund split between HSBC, Barclays and Lloyds. He also has 20 per cent of his fund in other ‘financials’ such Legal & General, St James’s Place and Prudential.
Old Mutual UK Alpha has a clean OCF of 0.78 per cent.