Much of the best action in the UK stock market over the past five years has come from smaller and medium-sized companies. To some extent, their larger counterparts have been forgotten and left behind.
One fund I believe should be considered to rebalance this is the Old Mutual UK Alpha Fund, managed by Richard Buxton. After running the same mandate successfully at Schroders for more than 10 years, Mr Buxton was poached last year by Old Mutual to run a fund identical in style. The new fund is already over £1bn in size and is still receiving healthy inflows.
Since his move last June, performance has been encouraging. However, it has not all been plain sailing. Earlier this year two companies in the portfolio, Rolls-Royce and Tate & Lyle, issued profit warnings on the same day, leading to falls in their share prices. That said, he hasn't sold either position and is likely to add to both positions on further weakness. He will shortly be meeting Rolls-Royce's management and maintains confidence in a strong order book; and while Tate & Lyle is in a period of transition, he believes investors are overlooking the firm's longer-term potential.
Mr Buxton may be one of the UK's most well-known stock market bulls, but even he felt somewhat queasy at the beginning of the year, given a plethora of optimistic comments on the economy and the market. He was, therefore, quite pleased to see a dip in January bringing some fear back into the market. He took the opportunity to top up positions in which his confidence remains, such as International Consolidated Airlines, on the back of price weakness.
Following a strong 2013, 2014 may see more of a churning effect. Indeed, so far this year 25 per cent of FTSE 100 companies have disappointed in their reporting. Like many fund managers, Mr Buxton makes the point that earnings growth needs to come through in order for prices to continue to rise. He notes, however, that the US, whose economy has been picking up strongly, and where monetary stimulus has been reduced but not eliminated, has been a source of strength for world stock markets. Interestingly, European and UK markets have seen a turnaround during afternoon trading, following falls in morning trading. Mr Buxton notes this is often a result of American share-buying.
Mr Buxton's fund is very much the antithesis of a tracker. He has always realised you have to do something different in order to add value over and above the benchmark. More recently he has been buying out-of-favour mining stocks where he expects demand for resources to be better than the market believes; Chinese demand for commodities is likely to remain robust, companies are scaling back production and cutting costs, while Mr Buxton expects to see greater concentration on shareholder value.
His contrarian approach is reflected in the fund's top holdings which include HSBC, Lloyds, Royal Dutch Shell and Rio Tinto. Elsewhere, he has had great success with positions such as International Consolidated Airlines and Legal & General.In terms of his wider views, Mr Buxton remains highly critical of the present political scene. In his view, politicians are being particularly unhelpful to investment and business development. Indeed, the current opposing party are meddling to such an extent that it could put off investment ahead of the next election. He believes the Government is acting far too hastily in the case of RBS. Mr Buxton supported the bank's former chief executive Stephen Hester who, he felt, was doing the right thing by not selling off assets too rapidly. The result is Mr Buxton doesn't see taxpayers ever getting their money back.
Despite this, he remains a stock picker at heart and he believes the backdrop for equities is excellent. Though a gently rising trend in interest rates could derail this case, inflation has been falling so there is hardly any need to raise rates dramatically just yet. In this type of scenario he sees equities grinding up slowly but surely.
Mr Buxton seems to have settled in well since his move to Old Mutual, and in my view he retains an excellent pedigree as an active fund manager. I believe his fund could form a part of almost any long-term UK portfolio.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independentReuse content