Old Mutual UK Alpha - profit from pessimism

Dominic Rowles | Tue 17 April 2018

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• Richard Buxton is a contrarian investor who seeks undervalued companies
• His investment style has held back returns in recent years
• The fund’s long-term performance remains impressive and it retains its place on the Wealth 150

Our View

The UK is currently home to one of the world’s most unloved major stock markets. Uncertainty over Brexit has spooked many investors into searching for returns further afield. We think the UK won't remain out-of-favour forever and investing before unloved areas return to favour has historically been a great way to build wealth over the long term. In our view, investing in a fund run by an expert manager is one of the best ways to gain exposure.

The Old Mutual UK Alpha Fund is managed by veteran investor Richard Buxton, who benefits from the support of an experienced team at Old Mutual. They seek companies overlooked and undervalued by other investors and the portfolio comprises around 35 of their best ideas. The fund’s concentrated nature means each company can make a significant contribution to returns, although it is a higher risk approach.

We believe an experienced fund manager seeking undervalued companies within an unloved market is an attractive proposition – the fund could be well-placed to benefit once sentiment turns. In our view, the fund has the potential to perform well over the long term, although there are no guarantees. The fund retains its place on the Wealth 150 list of our favourite funds in the major sectors.

Fund review

Richard Buxton identifies areas of the market that could benefit from change that has gone unnoticed by other investors. He then buys shares in companies he thinks have the potential to perform well when the change becomes more widely recognised. He tends to focus on larger businesses, although he has the option to invest in higher-risk smaller companies if he spots an opportunity.

This investment style has generated strong long-term returns. An investment of £10,000 made when the manager took responsibility for the fund in December 2009 would be worth £21,443*, while the broader UK stock market would have returned £19,214. The manager’s ability to select companies with strong prospects was integral to this, according to our analysis, although past performance is not a guide to the future.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2018.

The fund’s performance has been more subdued in recent years. Investors favoured the perceived security of established, high-quality companies with robust growth prospects – many of these are consumer staples businesses that have fairly consistent demand for their products. But the businesses undergoing change that the manager seeks have largely been ignored by other investors.

Many of these companies are more sensitive to the health of the UK economy and may see demand for their products or services change over time.

The fund is currently biased towards companies in the financial sector. Banks HSBC, Lloyds and Barclays all feature among the fund’s ten largest investments. The manager believes rising interest rates will allow the banks to earn more on cash deposits and charge more interest on loans and mortgages to their customers.

Outlook

Richard Buxton believes sterling is likely to remain weaker in comparison to most international currencies for the longer term. This could benefit larger UK businesses with overseas earnings, as the value of these earnings are enhanced when converted back to sterling. Elsewhere, the manager aims to take advantage of any further share price volatility by buying shares at lower prices, which could boost long term performance.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund including how to invest