Buxton, who made a high-profile switch from Schroders to Old Mutual in March 2013 to manage its UK Alpha fund, says UK equity markets are in for a prolonged rally of up to 15 years.He also expects the FTSE 100 to smash through the psychological 7,000 barrier in 2014.
However, he thinks the real drive will come in roughly two years when institutional investors such as pension funds become interested in financials again and is planning his fund’s exposure accordingly.
“We have a pro-cyclical portfolio because we believe the global economy will continue to get better, although in a somewhat uneven manner,” he said.
“We’ve got a third of the fund in financials, which will clearly be a beneficiary of rising flows into equity investment.”
“We started buying a position in the back end of 2012 when I started getting more enthusiastic about the equity market.”
“Over a long period, financials should also be a beneficiary of gradually rising bond yields, which over 10 years is very likely to happen, so over time the scope for profit growth should reward the equity holder.”
Performance of fund vs sector over 1yr
Source: FE Analytics
According to FE Analytics the fund has returned 19.85 per cent over the past year, compared with 17.85 per cent and 11.2 per cent from the sector and benchmark respectively.
However, the fund recently took a hit from several high profile profit warnings.
“It’s been a mixed results season, partly because the equity market did well last year so there is a lot of hope, re-rating and expectation and if you underperform, your share price gets punished,” Buxton said.
“We did get hit by Tate & Lyle and Rolls-Royce, but on a longer term view I’m confident that you will get the profit growth coming through.”
Rolls-Royce issued its first profit warning in a decade at the beginning of February due to defence spending cuts, pushing shares down 17.81 per cent, while Tate & Lyle’s shares fell down 17 per cent after cutting profit expectations.
Performance of stock vs index over 1month
Source: FE Analytics
Buxton is also hoping to gear exposure to companies recently hit by a strong pound to generate alpha.
“We’ve not done anything yet but we’re interested in a number of large multi-national companies, for example BAT and Unilever, where the strength of sterling has led to currency related downgrades to profit forecasts.”
“I don’t think sterling will remain as strong as it has done recently and in the run-up to the general election.”
“So for those companies that have had downgrades to their profit growth because of strong sterling, we should be buying those in the event that the currency headwind may become a tailwind.”
Buxton formed his ultra-bullish outlook for UK equities after studying historical financial data from 1918 to the present day.
“It showed you get these extended phases for equities where there is generally positive sentiment and then other extended phases where there’s lots of volatility, good years and bad years, but generally you don’t make much progress.”
“The FTSE 100 peaked at 7,000 back in 1999 and we’ve yet to hit it again and the message is now that 2014 will be the year after 15 years of going nowhere.”
He says he became bullish in 2012 when investors were disillusioned with equities because of a long bear market, the financial crisis, the threat of the EU breaking up and worries about going over the fiscal cliff.
“Retail investors had completely shunned equities as an asset class from it being the only thing to have a decade before.”
“Pension fund exposure to equities was at a minimal level compared with the 1980s and 1990s when we had 20 fabulous years, during which the stock market only lost money in two 12-month periods.”
“At this time, pension funds had 85 per cent exposure to equities; it was a complete no-brainer as people were so conditioned to think that they were a one-way bet.”
Buxton says the swing into equities has begun, but will accelerate when institutional investors become interested in the asset class again.
“We’ve had three years in a row of double-digit returns and over the last 12 months we’ve seen flows coming back to equities from private clients and stockbrokers and the general retail flow.”
“However, we’ve not seen much institutional flow and I’m not sure I’d expect that yet. It will require the easing of regulatory rules to see the big flows coming in from defined benefit schemes, which have effectively sold out of equities in favour of fixed income.”
“It takes years for people to get disillusioned with equities, but also it takes years for them to get re-enthused, so it will be a multi-year process of people gradually feeling that equity is delivering returns.”
“Personally I expect it will take several years of people losing money on their bond funds to really make things happen.”
Buxton's switch from Schroders to Old Mutual was one of the biggest fund manager moves last year, overshadowed only by Neil Woodford’s shock announcement he was leaving Henley-based asset manager Invesco Perpetual.
Buxton’s move to Old Mutual led to a massive increase in the size of the UK Alpha fund from £280m to just over £1bn in one year, but the manager has not even considered the event of its soft-closure.
“Ask me again when it is £5bn,” he said.
