InvestmentsApr 27 2016

How Buxton’s team spots risk at 50 paces

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How Buxton’s team spots risk at 50 paces

Chief executives and finance directors who give an “inconsistent portrayal” of their business should raise red flags to investors, according to the team behind Old Mutual Global Investors’ UK equities trades.

Veteran fund manager and chief executive Richard Buxton said his UK equities team has learned to tell when corporate heads are not telling him the full story, or are making decisions based on corporate vanity.

“I like company managers who stick to what they do well, without experimenting just to make a show of strength,” he said.

The team at OMGI - two of whom came over from Schroders with Mr Buxton in 2013, Errol Francis and Ed Meier - watch out for changes at a business which could turn out to be warning signs.

Mr Meier, UK equity portfolio manager, said when it comes to discussing stock selection or the current make-up of the £2.26bn Old Mutual UK Alpha fund, regular meetings with company management were crucial.

According to Mr Meier: “If a company becomes inconsistent about their portrayal of the business between our meetings, that is a red flag and will raise our proverbial eyebrows.

“Essentially, what we’re looking out for in order to amend an [investment] opinion is a moment of change. This could be in terms of a business model, competitive environment, management, governance or indeed share price or valuation.

“Changes can make us think about selling or start working on whether we should be invested.”

Top 10 UK Alpha Fund Holdings%
GlaxoSmithKline plc4.6
Aviva plc4.5
Sage Group plc4.5
Royal Dutch Shell plc Class B4.26
Vodafone Group plc4.1
Lloyds Banking Group plc3.8
BP plc3.6
AstraZenica plc3.4
HSBC Holdings plc3.4
International Consolidated Airlines Group SA3.3

This means when it comes to including a company in their portfolios, “management, good management, really matters”.

Dan Nickols, manager of the Old Mutual UK Smaller Companies fund, agreed, saying when it came to considering a company for inclusion, its management was his number one indicator.

“It is clear chief executives and senior managers who have too much hubris can make bad business decisions.

“I prefer entrepreneurial managers like Luke Johnson, part-owner of Patisserie Valerie, who can recognise a good growth model and stick with what works”, he said.

Patisserie Valerie is one of the holdings in his OM UK Smaller Companies fund, which he has managed for more than 10 years. At the end of March 2016, according to Morningstar data, the fund was £823.7m in size.

From style to stock selection
At a fund management dinner on 21st April, Mr Buxton was sporting some vintage silver bull and bear cuff links. When these were pointed out, he stated: “It reminds me there is a bull and bear story to every decision we make.”

Over 2015, the fund beat the Morningstar UK Small-Cap Equity category, returning 20.1 per cent, compared with the category return of 4.5 per cent. It also beat its benchmark index - the FTSE Small Cap (ex-investment trusts) Index, which only returned 7.1 per cent over 2015.

Mr Buxton added the team always debates each stock play carefully. Mr Meier agreed, saying: “Richard, Errol and I will continually discuss stocks in and out of the fund.

“We have a wider UK meeting once a week where we go through ideas, challenge others, discuss valuations and modelling, etc. It is collegiate, iterative and robust.”