InvestmentsNov 18 2015

OMGI’s Buxton looks for rate rise shake-up

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OMGI’s Buxton looks for rate rise shake-up

Old Mutual Global Investors’ Richard Buxton is hoping tighter monetary policy in the US will provide investors with a degree of confidence that has been lacking since the financial crisis.

Mr Buxton, manager of the £2.3bn Old Mutual UK Alpha fund, said a rate rise across the Atlantic, now widely expected to take place next month, could shift market dynamics domestically.

Investors concerned about the state of the global economy have prioritised corporates able to provide “clarity of growth” in recent years, to the detriment of more cyclical stocks, the manager noted.

Analysis of when this trend will break down has become one of the “key debates” among Mr Buxton and his UK equity colleagues, he added.

“The premium people pay for clarity of growth from equities continues to expand and expand. There has to come a time when people put more money behind financials and cyclicals generally,” he said, speaking at the annual Chelsea Financial Services investment dinner.

“This is a debate we are having on an almost daily basis – when will the moment arrive when people are confident we are through the worst, meaning you needn’t pay this big growth premium for certain stocks?”

Better-than-expected US employment data released on November 6, which fuelled expectations the Federal Reserve will hike interest rates next month, may mean this moment is near, Mr Buxton suggested.

“It is no surprise that HSBC began moving up post-payrolls,” he said.

Of late, the manager’s own preference has been to add exposure to what he sees as lowly valued megacap stocks. These include Vodafone, GlaxoSmithKline, AstraZeneca, Shell and BP.

BP and Shell have been hit hard by the collapse in the price of crude oil, to the extent that they are now yielding 7 and 7.5 per cent, respectively.

Mr Buxton has been building his position in BP in particular, most notably in September when its dividend yield was higher still at 7.5 per cent.

The manager does not prioritise income but a payout cut would have a significant impact on the company’s share price. He believes the oil majors will be able to preserve their dividends, however.

“When stocks’ yields are this high, the market is telling you they effectively aren’t [because they are betting dividends will have to be cut]. But for me these yields are for real. You can argue BP and Shell shouldn’t be prioritising payouts as much as they are, but the reality is that they continue to do so.”

Mr Buxton’s own performance has suffered this year, his fund having fallen 2.75 per cent compared with an IA UK All Companies sector average return of 3.9 per cent, according to data from FE Analytics.

The manager attributed this slump to a trio of stock-specific factors, but remains confident in the prospects for both UK equities and the UK economy.

Three stocks that have hurt Old Mutual UK Alpha

Glencore

The commodities trader and miner has fallen almost 70 per cent this year. Glencore’s share price slumped further in September when attention turned to its debt pile. Shares then rallied after the firm announced plans to deleverage. Mr Buxton is sticking by the position but acknowledged the stock is only likely to rise “in line with its debt reduction [progress]”.

Drax

The electrical power provider has seen its shares halve in 2015, largely due to the effects of the Summer Budget announcement that renewable electricity providers would be subject to the same climate change levy as other energy firms. Mr Buxton said he had spoken to politicians over what he sees as a change that is likely to hurt the ability of such businesses to attract capital.

Genel Energy

The oil provider founded by former BP chief executive Tony Hayward has slumped 60 per cent this year after renewed upheaval in Iraq left oil producers in the semi-autonomous Kurdistan region owed significant amounts by the regional government. Mr Buxton said he had let the position dilute within his portfolio rather than adding on weakness.