Rob Morgan: Buxton's active approach picks the best not the biggest
Saturday 21 July 2012
Towards the end of the bull market in the late 1990s, large, blue-chip companies outperformed the rest of the market. It was a time when Vodafone grew rapidly to represent a massive, 15 per cent of the FTSE 100 index.
Blue chips were so dominant that simply buying the largest companies led to success.
Understandably, tracker funds surged in popularity. The largest companies, by virtue of their size, dominated their portfolios.
At the time, the question was why pay for active management when such a straightforward strategy delivered success?
The trend couldn't last, and by the beginning of the new millennium fund manager Richard Buxton felt it had run its course. He believed the vast sums in trackers were actually helping to fuel blue-chip performance, leading to the overvaluation of many large companies. So 10 years ago he launched a fund to exploit the anomaly. Schroder UK Alpha Plus invested solely in what he felt were the most attractive shares in the market rather than the largest; in essence, the antithesis of a tracker.
At the time, Mr Buxton foresaw an environment where the UK market went sideways for a decade or more. He anticipated skilled stock pickers would generate the best returns by focusing on companies with improving prospects – and that passively managed funds which simply aimed to follow the largest companies in the index would disappoint.
This prognosis has largely proved correct. The UK market has ended up broadly where it was 10 years ago, albeit with considerable volatility along the way.
As Mr Buxton predicted, larger firms lagged and many active managers showed their value.Trackers fared poorly in this environment, but Schroder UK Alpha Plus did well. Since launch, the fund has gained 155 per cent versus 74 per cent for the sector and 86 per cent for a FTSE All Share tracker.
Having outperformed over this turbulent period, Mr Buxton is now optimistic about the future as he believes the next decade will be far better for investors than the last. The reason is simple: sentiment has become far too negative.
While concern over growth is certainly warranted, he believes a "muddle through" scenario for both economies and politics could result in a significant rally. However, he does concede there may be two-three years of little overall progress as debt is worked out of the system before a bull market can start in earnest.
Despite his belief the UK economy will be flat this year, Mr Buxton retains a firmly, anti-Armageddon approach in the fund. He believes, for instance, he can make money over the long term by holding UK banks, which have been under pressure, most recently from the recent Libor-fixing scandal. He feels many banks have made significant progress since the 2008/09 financial crisis and are far stronger. He has been notably vocal on Barclays and added to his holding when chief executive Bob Diamond resigned. He believes Barclays may emerge from the Libor-rigging episode with the smallest fine of the banks involved, and he downplays the risk of class actions against the company.
He is also happy to hold stocks sensitive to the UK economy such as Debenhams and house-builder Taylor Wimpey. After the pessimism surrounding these stocks he believes valuations are compelling and is impressed with their ability to generate profits in a tough environment.
A decade since this fund was launched and a battle continues to rage between active and passive fund management. Clearly passive investments are the cheaper option. For some, cheaper means better and that is the end of it. However, passive funds always underperform their index over time, as although charges are low there is still a cost that drags back performance.
Even those in the passive camp concede there are actively managed funds that do very well, and I believe it is well worth seeking them out.
As far as the UK market is concerned Mr Buxton is one of the best.
Rob Morgan is an investment analyst at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
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