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Buxton’s alpha mater

Richard Buxton’s Schroder UK alpha plus fund remains one of the market’s most popular products, run as a focused portfolio of the manager’s highest conviction ideas.

He joined the group in 2001 and has managed the fund since launch a year later, before which he had an 11-year stint running UK equity money at Barings.

At Schroders, Buxton works with a 16-strong UK equity team, with the analysts carrying out in-depth research into what drives share prices, such as operational gearing, for example, which the group feels is misunderstood in sell-side research.

Buxton is looking for companies with solid balance sheets, where the market valuation is underestimating potential upside in profits on a two to three-year view.

In recent times, Buxton – like most managers – did not anticipate how bad things would get in 2008 and fund performance therefore struggled, particularly in the fourth quarter.

This was largely down to positions in sold-down cyclicals and financials but the manager believes his stakes in companies like Barclays have subsequently been vindicated.

The £1.8bn UK alpha plus enjoyed a strong 2009, largely by maintaining the stocks that initially hit performance.

He says: “Our conviction was that central banks would do whatever it took to stave off collapse and yet had no desire to nationalise banks fully.

“Our analysts investigated how bad things might become but were simply unable to get earnings forecasts low enough to justify some of share prices early in 2009. This meant we were able to pick up many favoured stocks at distressed prices and saw the benefits when the rally kicked in.”

Buxton is uncomfortable with the description of last year’s bounce as a trash rally, with many good companies derated in 2008 alongside highly leveraged firms.

He highlights stocks such as Burberry and Next falling to ridiculous levels and says cyclical companies across retail, engineering and mining were punished, despite many having cash on the balance sheet.

“Last year was not a get-out-of-jail-free rally and I feel the scale of improvement in profit forecasts justified the bounce in share prices,” he says.

After such a strong run, the manager is toning down beta on the portfolio, trimming back his cyclicals and adding to the names left behind last year, such as BG, Shire, Tesco and Shell.

He stresses this is not an overtly cautious move however, with the fund remaining underweight pharmaceuticals and still avoiding defensive bellwether tobacco.

Another recent addition is utility Centrica but Buxton bought this as a strong two to three-year story not overly sensitive to GDP, rather than just a defensive play.

He remains happy with this blend of cyclicals and more defensive stocks to produce consistent performance in a year of sideways equity markets, albeit within a fairly wide range.

“In the absence of major bad news, the scale of recovery in corporate profits will be enough to drag the market up again after concerns on Chinese tightening or budget deficits hit prices,” he says.

Elsewhere, he still likes miners – citing strong supply/demand dynamics – and is more positive on banks than many competitors, with several managers still seeing the sector as uninvestable.

The UK alpha plus fund has positions in Barclays and Lloyds, plus a small stake in RBS that the manager intends to boost on weak days throughout the year.

“Our stance on banks is that regulators will give them enough time to rebuild capital bases and so much competition has dropped out.”

“These stocks will have rock solid capital and liquidity buffers, trading on 1.5/2 times book value. Buying is much safer than two years ago, when they were overleveraged and undercapitalised, and yet trading on 2.5/3 times book. It will be a long slow road for banks but we prefer to be invested now than in three years, when we expect taxpayers to be able to sell shares in RBS and Lloyds back to the market at a profit.”

On the macro front, Buxton sees a flat outlook for the UK but feels the economy could easily slide back into modest negative growth.

“We are facing a tough post-election Budget whoever wins and cuts and job losses in the public sector, all of which means two years of flat growth at best,” he says.

“The one positive for a UK equity fund is that larger stocks have increasingly little to do with the local economy so opportunities remain, despite a difficult domestic outlook.”

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