Large caps have outperformed since March as small and mid caps have seen their bull run come to an end, and some investors fear this is a sign the markets could be due a severe fall.
Performance of indices in 2014
Source: FE Analytics
However, Buxton (pictured) says that the economic data suggests that the recovery from the financial crisis is well underway and investors need to hold their nerve.
“In fairness, the valuation stretch between the mega-cap stocks and the rest of the market had reached levels by the end of 2013 from which there was always likely to be some snap-back.” “The catalyst within the market seemed to be the bursting of the hot momentum sectors – notably tech and biotech in the US, alongside some highly questionably priced IPOs here in London.”
“The bursting of this bubble quickly spread to a ‘take profits’ mentality in anything which had performed strongly in recent years, which inevitably meant many mid and small cap stocks, domestically-sensitive and cyclical shares.”
“Add to the mix the speed of the share price moves, forced cutting of leverage in clearly popular crowded trades, the corresponding unwinding of short positions in large caps and emerging market-related stocks and the consequences have been all too clear.”
“Is this purely a market and investor positioning issue, or is it reflective of deeper economic concerns?”
One of the issues that has caused investor concerns is the low level of yields on safe haven bonds, which is usually taken to be a sign of low investor confidence. The yield on the 10 year US Treasury fell to its lowest level in 11 months today.
However, Buxton says these fears aren’t warranted.
“Contrary to expectations at the start of the year, bond yields have fallen to levels suggesting that global growth is likely to disappoint,” Buxton said.
“Whilst data from China has remained weak, the US does appear to be shrugging off the effects of winter and job growth remains positive.”
“The UK is clearly in a strong recovery phase, although the European Central Bank is flagging the need for more stimulus in Europe.”
“Is the bond market telling us that in ‘the new normal’, the ‘lowflation world’, low nominal growth will prevent central banks from even beginning to take interest rates up from their emergency low levels?
“Without doubt, the post-financial crisis healing process is not over yet. But with the levels of economic growth likely to be delivered this year and next in the US and UK, it is difficult to believe that the bond market is really signalling that activity has peaked and is rolling over, nor that corporate profits will fall from here.”
“Corporate confidence is improving, as witnessed by improved hiring, rising job vacancies and higher levels of M&A activity.”
“More likely current market moves reflect prior investor positioning and sentiment. Trouble was expected in the bond market this year as US Federal Reserve tapering continued – instead the impact has been felt in crowded and illiquid equity positions.”
“The shake-out is testing those, like myself, of a generally benign and bullish outlook, as bull markets always ‘climb the wall of worry’.”
“It is creating opportunities to add to favoured holdings at attractive levels. It rightly forces you to re-examine your views and convictions, but I remain of the view that this is more of an internal market and positioning issue than anything more sinister.”
Buxton’s views are in line with those of the Nick Mustoe, chief investment officer at Invesco Perpetual and manager of the Invesco Perpetual Global Equity Income fund.
Mustoe says that he and Invesco Perpetual’s highly-regarded equity income team are sticking with their aggressive positioning rather than retreating into the currently in vogue defensive sectors.
Buxton took over the Old Mutual UK Alpha fund in June of last year, and has beaten the index and his sector since then.
Performance of fund versus index and sector since June 2013
Source: FE Analytics
Buxton's fund has 33.63 per cent in financials, a cyclical sector, and 23.06 per cent in consumer products. He also has large positions in industrials and basic materials.
The latter includes a position in mining conglomerate Glencore, Rio Tinto and Genel Energy.
The financial position includes Lloyds, HSBC and Aviva as well as St james place. All these are top 10 holdings.
The fund has ongoing charges of 0.78 per cent.