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Alpha aims for bull’s eye

Throughout my career, I have witnessed the raging battle between active and passive fund management. It has numerous protagonists on both sides, most of whom seem to handpick whichever set of statistics works best for them.

Clearly, passive investments (which aim to simply track the performance of an index) are the cheaper option. For some, cheaper means better and that is the end of it. However, the passive argument suggests you will actually receive market performance at a cheap price, which is not the case and all the analysis we have done shows passive funds underperform their index. This is not surprising. Some trackers don’t necessarily track very efficiently and although the charges are low there is still a cost, so effectively what you get is built-in underperformance rather than a market return.

That said, the active management side has hardly helped itself over the years. There are simply masses of mediocre managed funds and some which are simply appalling. The insurance companies and banks sector are to blame for an awful lot of them. However, even those in the passive camp concede there are one or two managed funds that do very well and I believe it is well worth seeking them out. Schroder UK alpha plus is certainly one, managed by Richard Buxton and his number two, Errol Francis.

The fund was set up in 2002 as the very antithesis of a tracker. In other words, a fund completely divorced from following any benchmark, allowing the manager a completely free rein in stock selection. It is most certainly not an expensive closet tracker. The fund has outperformed the FTSE All Share index by around 75 per cent since launch, so active fund management can be worth paying for.

There are always going to be periods of underperformance though and the last four months of 2008 was one such time. It is impossible for a fund manager to quickly switch an entire portfolio into defensive stocks and the precipitous market falls in the wake of the demise of Lehman Brothers hit the fund’s bank shares particularly hard. However, the managers held firm. Looking at their portfolio at the time, they felt they wanted to buy more of the stocks they held rather than sell them and in March 2009 their patience was rewarded when the market began a remarkable turn-round.

Given the difficult economic outlook at the moment, you might expect Mr Buxton to be feeling somewhat pessimistic. However, ever the contrarian, he is very bullish for 2011. He reasons that the market has de-rated over the last 10 years and, at the bottom of the bear market, average price-to-earnings ratios got down to about six, which normally signals a market low and lays the foundations for new a bull market.

He concedes there are plenty of things to worry about but points to the fact that companies have plenty of money to spend and it is the corporate sector that could get the economy moving again.

Richard Buxton believes lower government spending tends to be good for markets because the less the government interferes the better it is for companies. With the market on a prospective price-to-earnings ratio of around 10 for 2011, they see an increase of 20 per cent to return the market to fair value.
Interestingly, they are particularly bullish on a number of retail stocks such as Debenhams, believing the share price more than discounts the problems in the sector.

The one economic view they hold which I do take issue with is that the euro will survive the present problems. Mr Buxton argues the Germans simply have too much to lose as they own huge amounts of Southern Mediterranean debt. If the euro fails, German banks will have problems and a new German currency would soar in value, halting the present industrial boom in Germany.

Time will tell but Richard Buxton has an excellent pedigree as an active fund manager and I believe this is one fund you can buy with confidence providing you have a long-term view.

Mark Dampier is head research at Hargreaves Lansdown


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