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Fund Research & Insights

Schroder UK Alpha Plus

This offering earns our nod, but it’s not for risk-averse investors.

Emiko Kurotsu 22 October, 2007 | 8:37PM
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The fund is run as a compact portfolio of equities that uses cash and fixed-interest securities on a tactical basis. Manager Richard Buxton has over twenty years of experience in the industry, most notably having run the Baring UK Growth, Equity Income, and Global Growth funds throughout the 90s. He takes a mostly top-down approach to the fund, basing his asset allocation and sector positionin

g on macro-calls, such as structural growth in China, a rising inflationary environment, or position in the economic cycle, for example. His equity picks are based on analyses of a company’s valuations, price target to fair value ratio, return on capital, and the potential for 10-20% upside over the next twelve months.

It’s in this equity portion where Buxton has kept most of the 20-40 security portfolio in the past few years. He typically holds a 75/25 or 80/20 ratio between giant- and large-cap stocks to mid-caps. In an effort to limit volatility and risk, Buxton also refrains from holding any small-or micro-caps. His fixed interest stake adds to his defensive capabilities: He’ll also invest in short gilts when he sees fit. At the same time, he can take up to a 20% cash position (per UCITs limits), a stake that he has taken about three different times in the fund’s five-year history – most notably when the fund was launched amidst the bear market of 2002.

Buxton has executed this strategy with ease: the fund has ranked comfortably in the top-decile of its crowded UK Large-Cap Blend category for its one-, three-, and five-year periods. What’s more, he has managed to do this without a heavy small-cap weight (an asset class that has outpaced giant- and large-cap peers in the past few years) and a noticeable underweight in energy. He held, on median, about 14% less than category peers in this high-flying sector between August 2004 and December 2006.

Still, investors have reason to be cautious. First, despite the dearth of small-cap exposure, Buxton did maintain a significant mid-cap stake, which likely helped drive the fund’s returns. He was correct to do so, but it’s unclear if that area will offer as much upside going forward as it has in the past. Further, in such a concentrated portfolio, the fund’s downside can be exaggerated despite its ability to play defence with cash and bonds. Take, for instance, 2004, when a pass on the oil rally and a combination of stocks that went sharply southwards (e.g. Reuters, BA, and United Business Media), caused the fund to plummet to the bottom decile of its category. Indeed, the fund’s volatility is higher than the category average over its three- and five- year periods (as measured by standard deviation).

That said, we think Buxton has led this fund with talent, and his lengthy experience is what you want from a manager with such wide latitude to invest. We think this fund is an appealing choice for those willing to take on more risk than the norm in search of potentially higher upside from UK equities.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Schroder UK Alpha Plus Acc2.49 GBP1.03Rating

About Author

Emiko Kurotsu  Emiko Kurotsu is an exchange-traded fund analyst with Morningstar.

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