Wednesday, 29 February 2012

'I've bought more shares in Lloyds and RBS'

'I've bought more shares in Lloyds and RBS'
Leading UK fund manager Richard Buxton on why he favours financials.

Richard Buxton, fund manager at Schroders
Richard Buxton, fund manager at Schroders 
This June, Richard Buxton will have been managing the £2.5bn Schroder UK Alpha Plus fund for 10 years.
Launched to combat "sideways" markets, Mr Buxton's fund has met its mandate handsomely. If you had invested three years ago you would have doubled your money. We get his views below.

You said you 'couldn't wait' for 2011 to be over. What is your current market outlook?

If the market is particularly stressed, as it was in the second half of last year, any cyclical or long-term holding tends to go down.
The turnover on our fund is extremely low – we are looking at least a three to five-year view for all our holdings – and as a result we had a bad year. Clearly the moves by the European Central Bank in December have been a bit of a game-changer. We were concerned that a major European bank, or two, could end up in severe difficulties. It is no surprise given how depressed sentiment was at the tail end of last year that the removal of that risk has led to happier markets.
We have not repositioned the fund after a bad 2011, but we did add to the badly performing positions – Lloyds and Royal Bank of Scotland, for example. This year, the mood music has changed – we have had a better start. We knew there would eventually be stimulus, I just couldn't believe how long it took the ECB to do what they needed to do.

How long will this positivity continue?

We think it will be better this year, but it's still a mixed picture. There is recovery and dividend growth but we're not out of the woods yet; there are still issues to face and much scope for policy error. After the financial crisis we are in an environment where there are shorter economic cycles. We are going to have to live with shorter mini-cycles, but I think that is all part of the post-crisis recovery. It may well last another three to seven years.

Which sectors will thrive in this environment?

Sectors where valuations are weakest, because there is the greatest uncertainty and maximum fear. Ten years ago, big tobacco companies were risky. But they've had a fabulous decade of re-rating, going from pariahs to being well-loved. Today, few people invest in banks because of uncertainty around them, so they are trading at half book value. But on a five to 10-year view, they may actually do very well.

How do you respond to the accusation that all UK equity funds are the same?

Rest assured, my fund looks very different from others. It is a concentrated portfolio that is not built in relation to the index: I don't hold big companies just because they are big.
We set it up almost 10 years ago with the view that the index was going nowhere, so you did not want to invest in index trackers or actively managed closely correlated funds.
There are fewer winners in this environment, but if you can identify them you can do well.

What has changed since you started in the City 26 years ago?

I joined in the middle of a 20-year bull market. Back then, making money was a lot easier. It is harder now. I can see huge value but I can equally see reasons why it will take a while for that value to be realised. You can still find fabulous companies capable of achieving year-on-year growth or value companies that have been poorly managed and new management has gone in. But you have to be patient.

What has been your best investment decision?

I only invest in my own fund, so I don't have separate personal stock holdings. I have been very proud of [technology stock] Autonomy. It was hugely controversial, with many non-believers, but we continued to ride the volatility and were vindicated last year with the £7.1bn takeover by Hewlett Packard.

And your worst?

As a house, Schroders is very balance sheet-focused so we haven't generally suffered because of a stock having too much leverage.
For that reason we are big shareholders in Home Retail, which owns Argos and Homebase, and which has had a dreadful performance. But we know it is a survivor. It is not going the way of HMV and Woolworths. So we're sticking with it.

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