While pockets of the investor community will always want to use passively managed funds to gain exposure to the UK’s blue-chip stocks, the wide variety of fund researchers and analysts agree that the IMA UK equity sectors are littered with top performing active managers who have proven time and again that they outperform the market on a consistent basis.
The likes of Nigel Thomas, Nick Train and Alastair Mundy are just a few of the large-cap UK managers that have strong and consistent, long-term track records.
In the next article in the series, we compare two high-profile UK growth managers who have garnered a huge amount of attention over the past 18 months; Richard Buxton and Julie Dean.
Buxton, who had managed the Schroder UK Alpha Plus fund since June 2002, left the group last year to take up the post of head of UK equities at Old Mutual – taking on the little-known Old Mutual UK Alpha fund.
Following the star-man’s departure, Schroders brought in FE Alpha Manager Julie Dean, who has managed the five-crown rated Cazenove [now Schroder] UK Opportunities fund since December 2002, as well as the rest of the firm’s highly-rated fund manager team.
Dean was also named manager on the Schroder UK Growth Investment Trust, which had previously been managed by Buxton.
The two managers have significantly outperformed the IMA UK All Companies sector and the wider UK equity market over the last decade or so.
According to FE Analytics, between December 2002 when Dean took over her now £2.3bn UK Opportunities fund and May 2013 when Buxton officially stepped-down as manager of his UK Alpha Plus fund, both portfolios boasted top decile returns.
Performance of funds vs sector and index between Dec 2002 and May 2013
Source: FE Analytics
However, while both comfortably outperformed the FTSE All Share over that time, Dean outperformed Buxton by 48.1 percentage points, with returns of 294.85 per cent.
Despite that disparity in performance, Buxton does boast the more consistent longer-term track record. Our data shows that his Schroder UK Alpha Plus fund only underperformed the sector and index in three calendar years between 2003 and 2012;: they were 2004, 2008 and 2011.
In every other full calendar year, Buxton’s fund was a top quartile performer.
Dean, on the other hand, has really only outperformed in the period during, and since, the global financial crisis of 2008.
Her fund was a top quartile performer in 2012, 2011, 2009, 2008 and a second quartile performer 2010. However, her portfolio underperformed both the sector and index in four consecutive years between 2004 and 2007.
However, Dean’s performance – relative to Buxton’s – in the falling markets of 2008 and 2011 has helped her fund’s capital preservation characteristics.
Source: FE Analytics
Our data shows that the Schroder UK Opportunities fund was a top quartile performer for its downside risk, maximum drawdown, Sharpe ratio and annualised volatility during the period between December 2002 and May 2013.
While Schroder UK Alpha Plus had a better Sharpe ratio than the average fund in the sector when Buxton was at the helm, it was one of the sector’s worst performers in terms of its maximum drawdown and downside risk.
As FE Trustnet recently reported, however, the performance of Dean’s fund has tailed off over the past year.
She attributed the lacklustre returns to stock specific issues, such as the huge sell-offs in UK annuity providers Just Retirement and Partnership Group following the recent budgetary changes, and an overweight position in mid-caps – which also corrected earlier this year.
Buxton has now been running the £1.4bn Old Mutual UK Alpha fund for over a year and our data shows that while it has slightly underperformed against the average fund in the sector over that time, its returns of 9.24 per cent are greater than those of the FTSE All Share.
Schroder UK Opps, on the other hand, has underperformed against the sector over that time.
Performance of funds vs sector and index since June 2013
Source: FE Analytics
Though the two managers have performed well over the longer term, Ben Willis – head of research at Whitechurch – says that Dean and Buxton have very differing approaches to running money.
“Buxton adopts a more focused, high conviction and value orientated approach than Dean,” Willis (pictured) explained.
“Buxton will tend to have fewer holdings within the portfolio – generally 30 versus 40 for Dean, and he will also invest predominantly in FTSE 100 companies. Buxton will deviate to extremes from the index and looks for underlying themes, sectors and companies that are offering value opportunities or recovery characteristics.”
Willis says because of this approach Buxton will trade positions aggressively if necessary and will tend to be more volatile than the market over the shorter term.
Currently, Buxton has a high weighting to financials with the likes of HSBC, Lloyds Banking Group, Barclays, Aviva and St James Place all featuring in his top 10. He also holds large-cap miners such as Rio Tinto and Glencore as top 10 holdings.
Willis continued: “Dean, on the other hand, follows the business cycle approach and will invest, at time, quite heavily into UK mid-caps. The business cycle examines the types of companies/market areas that operate better or worse within the cycle’s stages (slowdown, recession, recovery expansion).”
“The portfolio is constructed on the basis of where Dean believes we are in the cycle. Like Buxton, Dean has no formal stock or sector restrictions and will trade aggressively to help add value to core positions.”
Dean’s largest sector weightings are services, industrials and financials and as of her most recent factsheet, her top 10 holdings only consist of FTSE 100 companies.
What the expert says
Willis rates both managers highly and says that funds are decent ways of playing the UK equity market. Nevertheless, Willis says that if he had to pick one of the two funds, he would go for Dean’s fund as he and the team have been long term-supporters of her strategy.
“Because we currently invest with Dean, and have done for several years, I would stick with her. Despite some hiccups year-to-date, her long term track record is excellent and cannot be ignored,” he said.
However, he does have some words of warning over the size of the fund.
Our data shows that while its AUM currently stands at £2.3bn, the majority of its outperformance came about when it was a much a smaller portfolio. For example, this time three years ago the fund was £150m.
“Even though Schroders are quick to placate investors whenever this is raised, I would be lying if I said it [the size] still didn’t concern me,” Willis said.
“I know that Schroders are not actively promoting the fund and that any big ticket monies would be turned away, but at Cazenove when the strategy as at £2.5bn they were talking of limiting inflows and the strategy is now well over £4bn [when you combine her Schroder UK Growth Trust].”
“However, recent short-term performance from Dean has not been great and she has been early in repositioning the portfolio and this has probably helped regulate inflows into the strategy.”
Willis, and other researchers like him, agree that Buxton can run considerably more money than his current £1.4bn AUM because he only invests in companies with a market-cap of more than £800m.
Willis adds that this apparent limitation could help the fund to outperform over the coming years.
“Given that value dispersion within the FTSE All Share suggests that UK blue-chips are looking good on a relative value basis, Buxton’s large-cap approach could be a good bet going forwards,” Willis said.
Old Mutual UK Alpha’s clean share class has a total expense ratio (TER) of 0.78 per cent and investors can buy its income units, as the fund has a yield of 2.27 per cent. Schroder UK Opps’ clean share class has an ongoing charges figure (OCF) of 0.94 per cent.
