Old Mutual UK Alpha - unloved companies return to favour

Heather Ferguson | Tue 03 January 2017

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• Richard Buxton seeks undervalued companies with longer-term potential yet to be recognised by other investors
• His value-oriented approach proved a headwind in recent years, but has recently come to fruition
• We believe this fund offers strong long-term growth potential, although shorter-term performance can be volatile

Our view on this fund

We are pleased to see a recent improvement in the Old Mutual UK Alpha Fund’s performance following a short-term spell of underperformance. We are also encouraged that Richard Buxton continues to adhere to his original investment philosophy, which has produced strong long-term results, although this is not a guide to how the fund will perform in future. His contrarian investment approach and the concentrated nature of the portfolio means performance can be volatile at times, so it is important investors maintain a long investment horizon. The value of an investment may fall as well as rise, and investors may not get back as much as they put in.

In our view, this fund offers a good way to gain exposure to UK larger companies. It maintains its place on the Wealth 150 list of our favourite funds across the major sectors.

Portfolio review

Richard Buxton, the fund’s manager, is a contrarian, value investor. He seeks out-of-favour companies he believes will benefit from changes that are yet to be recognised by the market.

For several years, UK growth companies outperformed their value-orientated counterparts. Against a backdrop of ongoing economic uncertainty, growth stocks were favoured for their certainty of earnings delivery. On the other hand, economically-sensitive companies, or those experiencing short-term difficulties, were shunned by investors and performed poorly in comparison.

Given the manager’s focus on the latter type of business, the fund underwent a period of underperformance relative to its peers from the end of 2014 until mid-2016. The weeks that followed the UK’s vote to leave the EU also proved painful as investors sought sanctuary in higher-quality growth stocks.

In recent months there has been a reversal of this trend and the fund has been positioned to benefit. Investments in a number of UK banks, including HSBC, Barclays and Lloyds, have recently performed strongly. In Richard Buxton’s view, UK banks are increasingly well-capitalised and could benefit from a future interest rate rise. Rising interest rates increase banks’ profitability as they are able to earn more interest on their cash reserves.

Investments in commodity-related stocks, such as Glencore, Royal Dutch Shell and BP, also performed strongly this year and benefited from a recovery in commodity prices.

Past performance is not a guide to the future.

Outlook and portfolio activity

Richard Buxton and his team at Old Mutual believe it is too early to assess the full impact of the UK’s exit from the EU on the economy, although they expect at least a short-term period of sluggish economic growth. The manager has reduced some of the fund’s exposure to the domestic economy by selling an investment in Legal & General. However, he maintains a bias to other life assurance companies, such as Prudential, which he feels are less reliant on the health of the UK economy.

However, the fund maintains investments in some other domestically-focused companies, such as Next and Tesco. The manager believes their current valuations do not reflect their longer-term prospects. Elsewhere shares in CRH, an international supplier of building materials, were purchased following Donald Trump’s election as US President in order to take advantage of any proposed increase in infrastructure spending. Potential investors should also note the fund can invest in smaller companies which can be more volatile than their larger counterparts.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.