Despite having a very bullish stance on UK equities, the manager of the £1.3bn Old Mutual UK Alpha fund is also retaining positions in emergent market focused stocks, which he says still have a long way to go.
Emerging markets have been one of the most unpopular asset classes over the past year after a sell-off began in April 2013 with net investor outflows running into the billions of pounds. However, the manager says the asset class’ out of favour status is making it eye-catching again.
“There is a lot of fear around emerging market prices and a lot of investor flight so instinctively the contrarian in you starts to say this has got to be more interesting than when it was a no-brainer and everyone was pouring money in a few years ago,” he said.
“I still have stocks in the portfolio such as Unilever and Experian which have very substantial amounts of growth coming from emerging markets.”
Both Unilever and Experian took a deep hit from the sell-off, plunging below the MSCI Emerging Market index for most of 2013. However, Unilever has since recovered, returning an 8.21 per cent growth in its share price compared to a fall of 3.77 per cent from Experian, since the sell-off began.
Performance of stocks vs index since May
Source: FE Analytics
Buxton says he is still very confident of the underlying long term growth prospects for emerging market countries, agreeing with his colleague my John Ventre who manages Old Mutual’s multi-manager range.
Ventre recently told FE Trustnet that investors could double their money buying into Chinese equities, particularly the country’s banks.
He says negative sentiment towards the region has now gone too far and investors could double their money if his bull case proves correct.
Despite Buxton’s sanguine stance on the overall case he expects emerging markets to become more differentiated in the future as investors search for greater returns.
“You will have to employ managers who can identify which developing countries can genuinely develop on a long term basis than others that may struggle and that has been part of what we have seen in the last 12 - 18 months,” Buxton said.
He also expects an uneven ride for growth.
“For those countries that massively subsidise domestic fuel prices I maintain this is hugely unsustainable and they will eventually have to address that which will not be without difficulty.”
“However, as a stock-picker you have to be company specific and fortunately I'm not an asset allocator.”
Buxton, who made a high-profile switch from Schroders to Old Mutual in March 2013 to manage its UK Alpha fund recently made headlines with his very bullish stance on UK equity markets which he says are in for a prolonged rally of up to 15 years.
His sentiment on emerging markets is shared by his former colleagues at Schroders Johanna Kyrklund, who heads up its multi-asset investments and multi-asset manager with Urs Duss.
Although emerging markets look broadly cheap they say that value is divided, with the cheaper regions such as Russia unattractive due to political risk and as a consequence, to be avoided.
They say Asian emerging market countries are more favourable due to their robust fundamentals and participation in global growth.
Buxton is also holding strong on another contentious area of the market: house builders.
The house building stocks have seen some of the greatest returns since the financial crisis, with stocks seeing returns of upwards of 150 per cent, over three years.
However, in recent week’s shares prices have fallen with many investors taking profits.
“The fact that some of these shares have done very well for a period of time after coming of very distressed valuations, the risk of selling them too soon because they have done well, where actually you have only had the benefit of improving transactions and confidence for a few months, they will look back in a few years and think that was a big mistake.”
Buxton is keeping positions in big house building names Persimmon, Taylor Wimpey and Barratt Developments
All three have seen triple digit returns over three years with Barratt pushing a gain of 250 per cent.
Performance of stocks vs index over 3yrs
Source: FE Analytics
However all three have lost money over past month, hit by the sell-off, but Buxton says they will recover and have further to go.
“Yes, they are not cheap anymore but they have only had a positive economic tailwind for 12 months. You haven't even had the operational leverage that you will get from an expanding economy and missing that is the danger of selling too soon.”