One of the managers who arguably set the trend was Richard Buxton (pictured), who told FE Trustnet as early as July 2012 that he was gearing up for a sustained bull market in equities.
Buxton, who recently moved from Schroders to take over the Old Mutual UK Alpha fund, believes that the improving outlook for the UK economy combined with the under-ownership of equities will see risk assets rally for a decade or more. The manager doesn’t claim the UK market is dirt cheap, acknowledging that the FTSE has already had a very strong run over the past five years or so.
However, he thinks markets are at low enough levels for there to be a significant re-rating in the coming years.
“We’re not finding the bargain basements like we did in 2009 and 2010, but we’re still finding some very attractively valued companies,” Buxton said.
While he considers valuations when he buys a company, he is not solely a value manager, wanting to see a reason beyond valuation before he invests.
“I’d suspect [value managers] may be buying Tesco at the moment, because it is very cheap on a historic basis,” he said.
“Suppose Tesco does sort itself out and stop spending money, it would do well, but I need to see a catalyst before I buy. They may not sort themselves out for five years. Value in itself isn’t enough for me.”
Nevertheless, Buxton says there are still cheap quality companies that he thinks are set for a reversal in fortunes. Here are three of the large cap companies the manager is backing at the moment.
Royal Dutch Shell
Shell, one of the largest companies in the UK with a market cap of over £132bn, has lagged the recent rally in the UK market, returning just over 3 per cent over the last year. It has also underperformed the wider FTSE 100 index over three and five years.
Performance of stock over 1yr
Source: FE Analytics
The company is trading on a price/earnings (P/E) ratio of under 10 times, making it materially cheap compared with the overall index, which is trading at around 13 times.
Buxton says that the main reason why Shell has been largely ignored by investors is because it has been one of the few companies that has been willing to reinvest.
“This is a quality company we’re talking about, but investors want to see it spending less money and paying out more in the form of a dividend,” he explained.
“They’re turning around and saying ‘sod you, we’ve been growing our dividend since the Second World War and we can continue to do that while reinvesting’, and I don’t blame them.”
Shell is currently yielding 5.5 per cent, making it one of the highest yielding mega caps available to investors.
Although it has struggled to keep up with the rally and remains “underowned”, according to Buxton, it is currently a top-10 holding for over 300 funds in the IMA universe. These include Buxton’s Old Mutual UK Alpha fund, as well as Aberdeen UK Equity Income and Fidelity Special Situations.
Lloyds
“I still think that on a multi-year view, the banks are cheap,” said Buxton. “They’re too toxic for a lot of investors, who are now talking less about regulation and instead about capital ratios, given that the chancellor keeps changing the number.”
“Lloyds is further down the line than a lot of banks, which is why it is now trading at 75p instead of 35p, but over time I think there’s little doubt that its book value will grow, and it will be over £1 a share.”
FE Analytics data shows that Lloyds has returned 204.6 per cent over a two-year period, though has still lost money over a 10-year period thanks to its dreadful run in 2007 and 2008.
Performance of stock over 10yrs
Source: FE Analytics
Lloyds, previously ignored by the vast majority of fund managers, is now a top-10 holding with 84 funds in the IMA universe.
The bank is Buxton’s biggest single position at just over 4 per cent, and is also a major holding for the likes of Jupiter Undervalued Assets [9.3 per cent] and Fidelity Special Situations [6.8 per cent].
Buxton adds that the possibility of Lloyds paying a dividend next year could further strengthen its share price, as equity income investors would be more compelled to buy it.
Rio Tinto
Buxton has been building up his exposure to FTSE 100 mining company Rio Tinto since he took over Old Mutual UK Alpha earlier this year and it is now a top-10 holding.
He says worries over the commodities market have been overstated, providing a good opportunity to snap up shares in Rio.
“The consensus view is that commodities are at the end of a 12-year bull run,” said Buxton. “China is slowing down and so there is an oversupply.”
“Our argument is that the slowdown in China is a gradual 10-year process. Infrastructure will continue to make up a huge part of GDP over the next three to five years as the economy rebalances.”
“I’d be really surprised if demand fell away as people are expecting. The price of iron ore is a lot higher than many think.”
“In any event, companies like Rio and Glencore are low-cost producers with a very good return on capital.”
Buxton adds that the attractive dividend yield on Rio, currently at 4 per cent, adds another dimension to the stock.
Rio has failed to take part in the recent rally in the FTSE, losing 22.74 per cent over three years.
Performance of stock and index over 3yrs
Source: FE Analytics
In total, 160 funds include Rio in their top-10. These include Artemis Income, Cazenove UK Opportunities and Cazenove UK Equity Income.
