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 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 reckoned the vast sums in trackers were actually helping to fuel blue-chip performance, leading to the overvaluation of many large companies. Ten years ago he launched a fund to exploit the anomaly. Schroder UK Alpha Plus invested solely in what he considered were the most attractive shares in the market, rather than the largest; in essence, the antithesis of a tracker.
At the time Buxton foresaw an environment where the UK market went sideways for a decade or more. He expected that skilled stockpickers would generate the best returns by focusing on companies with improving prospects – and that passively managed funds that 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 Richard 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, Richard 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 reckons a “muddle through” scenario in both the economy and politics could result in a significant rally. However, he does concede that there may be two to three years of minimal overall progress as debt is worked out of the system before a bull market can start in earnest.
Despite his belief that the UK economy will be flat this year, Richard Buxton retains a firmly anti-Armageddon approach in the Schroder UK Alpha Plus fund. He believes, for instance, that he can make money over the long term by holding UK banks, which have been under pressure, most recently because of the Libor-fixing scandal. He says 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 in the bank when chief executive Bob Diamond resigned. He reckons Barclays may emerge from the Libor-rigging episode with the smallest fine of the banks involved, and he plays down the risk of class actions against the company.
You certainly can’t accuse Richard Buxton of having consensus views. He is also happy to hold selected stocks sensitive to the UK economy such as Debenhams and house-builder Taylor Wimpey. Such has been the pessimism surrounding these stocks that he reckons their valuations are compelling and is impressed with their ability to generate profits in a tough environment.
A decade on since Schroder UK Alpha Plus was launched, a battle continues to rage between active and passive fund management. It will surely rumble on for many years to come. 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 long periods; not a surprising observation 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 Richard Buxton remains one to consider.
Rob Morgan is investment analyst at Hargreaves Lansdown