Five-Year Performer: Richard Buxton

Richard Buxton, manager of the Schroders UK Alpha Plus fund, explains his strategy of combining careful stockpicking with top-down thematic views.

Richard Buxton predicted, at the launch of the Schroders UK Alpha Plus fund in 2002, that markets were unlikely to move upwards for the next 10 years. It seemed pessimistic, but the FTSE 100 was hovering around 5,000 at the time, and is now only a little higher. This supports the premise of the fund: if markets are going nowhere then index-plus approaches are worthless. Managers need to seek out high-conviction ideas that can generate returns above those of the market.

It is an approach that has worked well for Buxton over his eight years at the helm, though returns have come in waves. He has delivered 8.73% annualised over five years, leaving him comfortably first quartile in the UK All Companies sector. He is also first quartile over one and three years. His strongest years were 2006 and 2009, which suited his high conviction, concentrated style. His weakest year was 2008.

Buxton is looking for companies in the process of change, so his ideas can take some time to come to fruition. He invests with a two-to-three year time horizon and turnover on the fund is low. His average holding period is three years or more. He holds 35 stocks, of which around 25% will be mid-caps.

He says: “We are looking for situations where there is growth or recovery that is not reflected in the share price. For example, this could be something like new management, as has happened at Misys or Logica. These companies had been poorly managed, or had overpaid for acquisitions, but the new management is trying to turn around the company and generate strong returns.”

But Buxton is not a pure stockpicker and incorporates a top-down thematic view in his process. He says: “We look at where we are in the business cycle and where economic activity is picking up or slowing down. This could mean looking for companies that are benefiting from the growth in Asia, for example. Until relatively recently, miners were 1% of the index. They are now around 10% because of what is going on in China and India. There has been a structural change.”

Buxton believes the market may have another five years of going nowhere ahead as it unwinds the excesses of the bull market of the 1980s and 1990s. In the shorter-term he says: “The market is likely to dip below 5,000 and move above 6,000 in 2010. We have taken some profits – trimming positions in some more cyclical stocks and adding stocks that have lagged, such as Tesco or Shell.”

He has been toning down the market sensitivity of the portfolio since the middle of last year from a pro-cyclical, anti-defensive position at the start of 2009. This had worked well for him and he delivered 50.29% across the calendar year. However, he is still holding onto some of his positions, notably RBS, believing that, over a three-to-four year period, it will generate a return on equity for which investors will be willing to pay a higher premium.

Historically, he says his biggest mistake has been not seeing how bad things would get in 2008. He adds: “The portfolio was not defensively positioned and it was a case of simply gritting my teeth and adding to stocks that had become extremely undervalued.” The fund lost 36.5% over the year, 4% behind the sector average.

He has profited from a longer-term commitment to the mining sector. He says: “We saw the  20-year bear market in commodities, which had seen a lack of investment and weak returns. We felt that would turn round and almost certainly become a 20-year bull market. We have been consistently positive on the mining sector and retain our holdings.”

Judicious stockpicking has also played a part in the fund’s performance. Buxton has held Burberry since its demerger from GUS and it has done well over that time. Equally, Thompson Reuters has been a strong performer and Buxton still holds it. He has held Standard Chartered bank since 2002 and it continues to do well for the fund.

The fund has continued to perform in spite of its size, now £1.9bn. Buxton’s preference for larger capitalisation stocks has helped him deal with inflows and he also relies on Schroders’ substantial analyst team to generate and research ideas. Any return to a more selective, stockpicking market in 2010 should favour his style.