Now may be the perfect time to buy Richard Buxton’s Old Mutual UK Alpha fund following its tough period of underperformance, according to iBoss’ Chris Metcalfe, who is considering using the large-cap value fund to balance out his mid and small-cap UK exposure.
There is no doubt that 2015 has been a year where smaller companies have proven their worth as an improving economic recovery in the UK, and the fact they were out of favour going into the year, have boosted returns.
Mega-caps, on the other hand, have largely struggled as fears of a slowdown in China and falling commodity prices have hurt significant chunks of the internationally-facing FTSE 100 index.
Performance of indices in 2015
Source: FE Analytics
This difference in performance is quite clearly shown in the IA UK All Companies sector tables in 2015, with its top quartile littered with lower-cap funds (such as ConBrio Sanford Deland UK Buffetology, PFS Chelverton UK Equity Growth and FP Miton Undervalued Assets) and its bottom quartile full of large-cap value funds. 
Those include the likes of Schroder Recovery, Investec UK Special Situations and M&G Recovery, but also Buxton’s £2.3bn fund.
Buxton has been in the press a lot this year as he was recently made chief executive at Old Mutual Global Investors, sparking many to question whether he will be able to split his time effectively between his fund and the group as a whole.
However, Metcalfe – investment director at iBoss – says that as the fund has underperformed, people are concerned about the future of the portfolio and most of his current UK multi-cap managers are severely underweight the bombed-out FTSE 100 index, now is great time to take another look.
“We are looking to bring in a large-cap fund. Slightly bizarrely for us, we are looking at Richard Buxton – now that unticks every box for us,” Metcalfe (pictured) said.
“He is a ‘star manager’ (and we don’t tend to go for those), he has just taken on CEO role at OMGI so he is now doing at least two jobs (we don’t like that) and the fund size is probably bigger than we would usually hold.”
He added: “Pretty much everything we have said we don’t like is there.”
“But Buxton is an out and out large-cap manager and we do hold a lot of funds which give us exposure to mid and small-caps – Franklin UK Managers' Focus, Neptune UK Mid Cap, Unicorn UK Income, SVM UK Growth and CF Miton UK Value Opportunities.”
According to FE Analytics, Old Mutual UK Alpha is down 3.36 per cent year to date compared to a 3.49 per cent and 0.60 per cent return from the IA UK All Companies sector and FTSE All Share respectively.
While a large-cap value style hasn’t been conducive to the recent market conditions, Buxton says that he has had a number of painful stock-specific issues this year as well – namely in the form of Drax, Genel Energy and Glencore.
Performance of stocks versus index in 2015
Source: FE Analytics
Nevertheless, the fund has taken advantage of the recent rally since the significant sell-off on 24 August and is ahead of its peers and its benchmark over that time.
While Metcalfe admits he doesn’t know how long large-caps will outperform for, he says that now is a good time to look at the fund as the underlying investor in it has a clear idea of how Buxton’s fund should react in different market conditions.
He also isn’t overly fussed that Buxton has taken on his new role.
“At the end of the day, he is a good stock-picker. He isn’t going to go where the ‘value’ is, he is going to go where he always has gone,” Metcalfe said.
“I do think the funds we have in that space all need to be doing something different. Our UK portion of the portfolios has been one of our best performing sectors, but the best period we have had has been the past six months or so.”
FE data shows that Metcalfe’s UK allocation has performed well. For example, and equally weighted portfolio of Franklin UK Managers' Focus, Neptune UK Mid Cap, Unicorn UK Income, SVM UK Growth and CF Miton UK Value Opportunities has returned a hefty 17.92 per cent over the past 12 months while the index has barely broken even.
On top of that, the portfolio has had a maximum drawdown of just 3 per cent compared to the FTSE All Share’s 11.73 per cent.
Performance of portfolios versus index over 1yr
Source: FE Analytics
Metcalfe continued: “Now, if you can find a set of market conditions that are fantastic for [a small and mid-cap bias] there will be another set of circumstances that will provide the opposite for us.”
“Most of that outperformance has come from great stock-picking from the likes of Miton and SVM, but we have also done well out of just being in the small and mid-cap space. I just think we need something else in there to balance things a bit.”
Buxton has certainly performed well over the longer term, earning his star manager status during his time on the Schroder UK Alpha Plus fund. 
He is also one of the few managers who has been able to outperform since the financial crisis without just overweighting the UK mid and small-cap space. Since he took charge of his Old Mutual fund in December 2009, he has beaten the FTSE All Share by more than 20 percentage points despite keeping close to 80 per cent of his portfolio in the FTSE 100 at all times.
As you can see, however, the events of 2015 have eaten into his outperformance relative to the more mid-cap biased sectors.
Performance of fund versus sector and index under Buxton
Source: FE Analytics
Nevertheless, Buxton says we are still in the foothills of a 10 to 15-year bull market, but that the index has had a necessary breather. He is therefore very bullish, saying that a value strategy in large-cap land will soon be the best way to outperform the wide market.
“In this environment, the premium people have paid for growth from equities has just continued to expand, expand and expand. There has to come a stage where people feel it is safe enough to put more money behind more cyclical stocks,” Buxton (pictured) said.
“That’s the key debate we have around our desk on a near daily basis – the moment that people feel we are through the worst and you needn’t pay this massive premium for those ‘certainty’ of growth type-stocks.”
For example, he says he used the set back to add more to very unloved mega-cap stocks, such as an entirely new position in BP. Now, his top 10 consists of bombed out large-caps such as Barclays, Lloyds, HSBC, Royal Dutch Shell and Vodafone.
Old Mutual UK Alpha has an ongoing charges figure of 0.85 per cent.
