Right now, some of the best and most experienced fund managers in the UK have completely different views on the stock market. As the saying goes, “That’s what makes a market.” Last week, I covered Neil Woodford, Invesco Perpetual’s equity income manager, who has positioned his portfolios defensively because he believes the economic backdrop is extremely poor.
This week, I shall discuss Richard Buxton’s Schroder UK Alpha Plus Fund. While he also believes things are poor in economic terms right now, he feels that by the summer, some evidence of an improvement should start surfacing. Thus his portfolio is somewhat differently positioned.
The Schroder UK Alpha Plus Fund was launched in July 2002, and its record since its launch ranks it 11th out of 216 funds in its sector, although recent performance has certainly been disappointing. However, this fund is always likely to be volatile over short periods; it is highly focused, with between 20 and 40 stocks (mostly larger companies) and fairly high turnover. It is, in other words, the antithesis of a tracker fund.
Much of the fund’s recent poor performance can be attributed to an 8 per cent position in domestic banks, although because their share prices have fallen so far, this now amounts to about 4 per cent. Now, I know that politicians love to blame the crash in bank shares on shorting by hedge funds, but by and large this hasn’t been true. In fact, the biggest sellers of the shares have been traditional institu
tional managers who have simply lost all faith in the banks. They would prefer to sell rather than have to explain to their trustees and investors why they are still holding a bank that may shortly be nationalised.
Despite these concerns, Mr Buxton believes there is every chance for the banks to rise dramatically. This was illustrated this week by the huge rise in Barclays shares, although by the time you read this, who knows what else has happened? We really are in extraordinary times when a blue-chip stock such as Barclays can rise by 73 per cent in one day. It is a huge headache for fund managers, who can be a hero to their investors one day and a villain the next.
Apart from banks, Mr Buxton has also been hurt by not investing in pharmaceuticals. His large holdings include the likes of BG Group, Shell, Shire, Charter and Dana Petroleum. He also favours Invensys, a company which he believes illustrates how much the market is taking the problems in the economy into account. It has a market capitalisation of £1bn and is valued on a price-to-earnings ratio of 6.5 times, which makes it appear cheap considering that it has £300m of cash on its balance sheet. The problem, of course, is that every time we believe all the bad news is already in the price, more bad news appears and the market falls even further!
Perhaps we are in a slightly different environment in that the market, instead of trying to discount the future, has given up and is merely responding to good or bad news. However, what Invensys tells us is that, at the present time, there is very little differential between stocks with large amounts of cash on their balance sheet and those without. All seem to have been hit indiscriminately. Clearly, at some stage this will change and stronger stocks should be re-rated.
I believe that, in the short term, defensive stocks (such as those in Neil Woodford’s portfolio) are definitely the place to be. However, on a longer-term view there could be some great value in more cyclical areas. It seems like a risky call to make at the moment, but if you’ve got a fairly positive outlook and want a foot in the potential recovery camp, then Schroder UK Alpha Plus is a fund to consider.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent