Investors are wrong to fear short-term volatility in equities, according to Old Mutual Global Investors’ Richard Buxton, who urges them to buy into the market if there are any corrections as a result of the Greek debt negotiations or a potential interest rates rise in the US.
2015 has been largely categorised by bearish outlooks from notable industry experts as while equity markets have continued to climb the wall of worry, fears have grown over the immediate future of risk assets.
These have ranged from concerns about further monetary policy tightening by the US Federal Reserve, which could be “brutal” for both bonds and equities and lead to, according to FE Alpha Manager Crispin Odey, a downturn that will be remembered for 100 years as growth has remained weak despite all of the world’s central banks’ fire power.
“We are in the first stage of this downturn. It is too early to see what will happen – a change of this magnitude means the darkness and mist is very great,” Odey said. “I am amazed to see so many are fully invested given that equities are already fighting the downtrend.”
However, Buxton says that though there are plenty of issues to worry about, investors should use any volatility from either the ongoing Greek debt negotiations or potential interest rates rises in the US as buying opportunities because the outlook for equities on a long-term view is very attractive.
The manager of the five crown-rated Old Mutual UK Alpha fund has long held the view that investors are in the “foothills” of a multi-decade-long bull-market – despite the fact the FTSE All Share is already up 156 per cent since it bottomed after the financial crisis in March 2009 – and sees no reason why that isn’t still the case today.
Performance of index since March 2009
Source: FE Analytics
“I think bring it on in terms of these rolling setbacks, as we need them. We need some of the multiple expansions to come off a little bit and there are companies I want to invest in with share prices I have in mind and [any volatility] would be great,” Buxton said.
“For many, volatility is to be avoided but I have wanted a setback and so do many out there too want to put money to work. I’ve got things I’d like to be diving into and I always get more excited when there is fear and panic rather than greed and euphoria.”
While the FTSE 100 has breached its record high in 2015, UK equities have been on a markedly downward trajectory recently.
The increasing possibility of a Greek default has been one of the primary drivers of the recent correction, but the improved chances of a Fed rate hike in September has also spooked equity investors as it has done in the bond market.
In fact, as the graph below shows, the FTSE All Share is down more than 4 per cent in just three weeks.
Performance of indices over 3 months
Source: FE Analytics
However, Buxton (pictured) sees no reason why this is the start of a longer term, more bearish, trend. 
“To some extent, it is good news that a) bond yields have backed up and b) equities have retraced quite usefully, but clearly they could spike lower over the coming weeks. But, as I have said all year, I think it is inevitable that the Greek situation or the Fed beginning to raise rates and the anticipation thereof would create some volatility and some very interesting buying opportunities,” he said.
“Yet again, today’s Merrill Lynch fund manager survey shows that cash levels have been raised once more; so conformation that there is a lot of cash out there and everybody is anticipating/waiting for a setback in order to buy back into more equity.”
“For me, I wouldn’t use the word ‘excited’, but I’m really starting to get interested in a number of shares coming back to levels where we are either interested in adding to existing positions or starting new ones.”
“Again, don’t be scared by volatility in equities I think this is bound to happen going through this Greek situation and the issue of the Fed. It’s easy to be constructive on equities on a three-year view; it’s just getting through the next six months which is the issue.”
For example, the manager says there will be no long-term impacts of Greece leaving the eurozone and that while prices may fall if the Fed does raise rates this year, it will only be tightening monetary policy because economic growth and inflation are improving.
Buxton is also very positive on the UK, as he says there is enough growth within the private sector to offset any headwinds facing the economy.
“The labour market continues to improve and it is corporates which are hiring so they are feeling confident and there is a little bit of wage and income growth starting. Housing transactions are steady and this is a good sort of growth as people are spending what they earn as there is still an aversion to debt following the financial crisis,” he said.
“Also, a question many people have is ‘won’t austerity just knock the recovery on the head?’ I couldn’t disagree more. I think it is a good thing that they are continuing to crack down on government spending as we cannot continue to spend more than we earn.”
“I think there is a sufficient self-sustaining recovery now so this will not knock the expansion on its head.”
While politics was a major worry for investors in the build up to the general election, many experts have warned that the surprise Conservative majority has thrown up further uncertainty in the form of a potential ‘Brexit’ from the EU.
“I suspect David Cameron’s slender majority in the Commons outcome will be met with an immediate sigh of relief by investors. However, this might be the calm before the storm. The prospect of an in-out referendum of Britain’s EU membership has gone from risk to a reality,” DeVere Group chief executive Nigel Green said on the day of the election result.
“Since this is likely to take place in several years’ time, this could lead to numerous years of ongoing uncertainty – something the markets are allergic to – and, in response, investors need to take precautions against a fall in the value of UK assets.”
However, Buxton says any fears about UK leaving the EU have been vastly overblown as it is an event which will simply never happen.
“I have a very strong view that there is absolutely nothing to fear from a potential referendum as there is no way there is going to be a ‘Brexit’,” Buxton said.
“I urge everyone to not waste hours over the next 18 months to-ing and fro-ing or watching programmes on all this massive daily news commentary – there is no way we would ever leave the EU.”
The manager says this is the case because there is a huge degree of commonality between national leaders in terms of renegotiating their EU memberships, Germany does not want the UK to leave and the inherently ‘conservative’ British electorate will vote for a continuation of the status quo.
Buxton, with his value approach, is best known for his work on the Schroder UK Alpha Plus fund, but made the high profile move to Old Mutual in May 2013.
He has headed-up the now £2.1bn Old Mutual UK Alpha fund since December 2009 as it was previously run as a segregated mandate.
According to FE Analytics, it has comfortably outperformed both the highly competitive IA UK All Companies sector average and the FTSE All Share over that time with returns of 91.92 per cent.
Performance of fund versus sector and index since Dec 2009
Source: FE Analytics
While there are many funds which have delivered stronger gains over that time, Buxton is one of the very few UK managers who has been able to outperform without moving into mid and small-caps as he has kept at least 80 per cent of his portfolio in the FTSE 100.
The fund, which counts the likes of Lloyds, Taylor Wimpey, Glencore and Royal Dutch Shell as top 10 holdings, has also outperformed both the sector and index in four out of the last five calendar years.
Source: FE Analytics
Old Mutual UK Alpha has a yield of 2.56 per cent and an ongoing charges figure of 0.78 per cent.
