Merian UK Alpha - opportunity in uncertainty
Dominic Rowles | Fri 22 February 2019
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- Richard Buxton invests in companies overlooked by other investors
- Performance was held back by company-specific issues over the past year
- The fund is more expensive than our favourites in the UK All Companies sector
Our view
Buying shares in out-of-favour companies that can change for the better is a tried-and-tested way to make money over the long run. But it's easier said than done. It takes an experienced hand to see the potential other investors miss.
Richard Buxton, manager of the Merian UK Alpha fund, has uncovered hidden gems throughout his career. He's also got the support of an experienced team at Merian. They tend to invest in a relatively small number of companies. That means each company has the potential to contribute strongly to performance. But it's a higher-risk approach.
Buxton recently announced his intention to stand down as CEO of Merian. We see this as a positive move. It means he can concentrate on the fund without the distraction of company management responsibilities.
We think there are lots of other high-quality fund managers investing in the UK though and their funds are available at lower cost. You can find our favourites on the Wealth 50.
Fund review
Richard Buxton looks for areas of the market that could benefit from change that's gone unnoticed by others. Then he buys shares in companies with 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.
He's found plenty of opportunities in the financial sector. Banks Barclays, HSBC and Lloyds all feature in the portfolio, as do financial services companies Aviva, Prudential and St James's Place.
He also invests in a number of companies whose fortunes are tied to the health of the UK economy. These companies have been overlooked by other investors in recent years but Buxton thinks some of them have potential to do well in the long run. Companies in this section of the portfolio include retailers Next and Pets at Home.
He hasn’t invested much in companies that sell essentials, like food, drink and tobacco, for a number of years. They previously performed well so he doesn't think their share prices have room to rise further.
This boosted performance over the past year as these companies performed poorly. But the fund still delivered a return lower than the broader UK stock market.
A few company-specific issues dragged on returns. An investment in sports betting and gaming company GVC did poorly because of concerns about the potential impact of more regulation in the UK. Buxton isn't worried though. He thinks the company's got plenty of opportunity to expand its US operations and expects it to do well over the long term.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
|
Jan 14 -
Jan 15 |
Jan 15 -
Jan 16 |
Jan 16 -
Jan 17 |
Jan 17 -
Jan 18 |
Jan 18 -
Jan 19 |
|
| Merian UK Alpha | 6.8% | -10.1% | 20.2% | 11.7% | -5.7% |
| FTSE All-Share | 7.1% | -4.6% | 20.1% | 11.3% | -3.8% |
Past performance is not a guide to the future. Source: Lipper IM to 31/01/2019
The manager's delivered better performance than the broader UK stock market since he began managing money in 1995. We put this down to his ability to invest in companies with strong prospects. Past performance isn't a guide to the future though. All funds will fall as well as rise in value so you could get back less than you invest.
Outlook
The UK faces lots of uncertainty. Negotiations to leave the European Union rumble on and, even at this late stage, there's no clarity on whether we'll reach a deal on things like trade and customs. There are also concerns the uncertainty around Brexit is beginning to affect economic growth. Further afield, the US-China trade war continues and it's anyone's guess how it'll end.
Uncertainty can cause some investors to overreact and make irrational decisions. But Richard Buxton sees it as an opportunity. It should allow him to take advantage of temporary share price weakness – both to make new investments and add to existing ones at lower share prices. This could benefit the fund's long-term performance.