Interactive Investor

‘Shut your eyes and wait 10 years – you’ve always made money at these valuations’

24th March 2023 09:33

by Sam Benstead from interactive investor

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Veteran UK stock picker Richard Buxton has been investing in British stocks for nearly 40 years. His fund, now called Jupiter UK Alpha  after Jupiter Asset Management acquired Merian Global Investors in 2020, is a long-term investor in large British companies.  Buxton sits down with interactive investor’s Sam Benstead to chat about the UK stock market and why today’s share prices are extremely attractive.  Drawing on his extensive investment experience, he puts today's tricky market into context, and shares his thoughts on which sectors and companies should perform best. 

Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Richard Buxton, manager of the Jupiter UK Alpha fund. Richard, thank you very much for coming in and speaking with us.

Richard Buxton, manager of the Jupiter UK Alpha fund: Not at all.

Sam Benstead: Richard, you've been investing in UK shares for nearly 40 years. What are valuations like today and how does this period compare with other periods in the past?

Richard Buxton: Well, valuations are very supportive, in part because there's been such persistent disinvestment really since the Brexit referendum. Both UK investors and international pretty consistently. So, we're at valuation levels where historically, if you can shut your eyes, buy now, come back in 10 years’ time, you will always have made money. Many of our companies have very strong balance sheets, quite high dividend payouts.

So, there's definitely value and opportunity in our market. Challenges as well. This is an unusual kind of downturn. I don't think we're going to have anything like the scale of recession that perhaps many people fear. In the early 1990s, we had three consecutive years of negative GDP. Obviously, interest rates were stuck at 15% because we were defending the currency and the exchange rate mechanism. We don't have any of that now, and instead we've got an incredibly strong labour market. Partly because of demographics and retirement and a shrinking workforce. But as a result, we're seeing reasonable levels of wage growth.

Inflation clearly is beginning to fall. But I question whether it'll fall all the way back down to 2%, I rather doubt it. So, a downturn where you've got a full labour market, [and] some reasonable wage inflation. Companies have got good balance sheets because any company that needed to raise cash did so in 2020 with the first wave of the pandemic. So, the bad balance sheet today is with the government. It's the government that has all the debt. And the Bank of England, with all the gilts that they've bought. So, I'm of the view that it's much more likely that the UK economy is just sort of very flat for a period rather than having the sort of downturn that is normally associated with fear of unemployment and rising unemployment, etc. So, I think I'm a bit more sanguine about the prospects than certainly the Bank of England has been.

Sam Benstead: And in this environment, which stocks and which sectors do you invest in then?

Richard Buxton: Well, I think you can invest in more cyclical companies, both industrials and consumer-facing companies, because I think the world is not about to fall off a cliff. If anything in the US, the central bank there, the Federal Reserve, is struggling to rein in the economy because again, they've got a very strong labour market. So, although they have been raising interest rates and housing transactions have clearly slowed, which again we've seen here since the disastrous mini-Budget in September, I don't think we're going to enter any sort of material downturn, so you can back companies that are more cyclically orientated, as well as some of those more traditional growth stocks and indeed financials.

Banks have really struggled for 10 years because a) the regulator was requiring them to build up more and more capital after the financial crisis, and b) interest rates were zero so that's been a very tough background for them, whereas now with interest rates at 3-4%, they can actually make a decent return.

Sam Benstead: And which banks do you own in the portfolio?

Richard Buxton: I own Lloyds Banking Group (LSE:LLOY) and Barclays (LSE:BARC). And Lloyds is a very good play on the nature of the UK economy and that we're not in bad shape. They're very capital and cash generative. They're very prudent in their lending. So, the recent results, I listened to the call and, really all the way out to 2025-26, they're pretty upbeat about the way that change in interest rates is going to help the profitability. As a result, they're going to be generating a lot of cash. They're going to be giving a lot back to shareholders through dividends and share buyback. So, although it trades at book value, that book value is going to rise over time. So, it is possible over time that you actually do get a re-rating of a stock like that because if the market can trust the consistency of it and there isn't some horrible bad debt cycle ahead to go through, because they are very prudent in their loans, then there's no reason why they couldn't trade above book value for the consistency of the delivery.

Sam Benstead: You've invested through lots of crises and market cycles. How does your experience help you manage the fund?

Richard Buxton: You're right. This is a job when the experience counts. And if you've been through a few cycles and downturns and crashes and panics, just not to panic. Say, last September or October, markets had been falling for nine months, we had our own little mini-crises in the UK around that Budget. But sentiment and the mood music had got so negative that you just felt very confident that this was a moment to be adding to positions, not panicking. And we've seen many shares rallying 30%, 40%, 50% from that low. Watchword number one is just learning the patience not to be spooked out of good companies at a bad point in the cycle.

Sam Benstead: You also invest in the energy sector. Why do you like it so much, and have you been selling shares given the strong performance last year?

Richard Buxton: I don't think it's going to do anything like as well as it did over the past 12 months. But again, the companies are throwing off enormous amounts of cash. They're able to reinvest in their businesses, and in the renewables, and yet still give yields and share buybacks to investors. And I do think that over the next several years, it is likely that we have persistently higher energy prices than we have had in recent years, partly because the companies have got the message from investors and they're not drilling for huge amounts of more oil and gas.

As I say, they are taking the cash from that and investing in wind and solar and so on. So, as a result of high prices you haven't had a supply response. For decades the rule in commodity markets was that the cure for high prices was high prices, because it would attract capital, you would drill, you would find, and prices would fall, and equally the cure for low prices was low prices, because capital would withdraw, supply would contract, and prices would rise. But the whole of the net-zero zeitgeist, and, rightly, the move to an energy transition has broken that sort-of golden rule. So high prices are not curing the supply issues. So, I fear that for the next several years we could have persistently higher energy prices than we have had historically. And that will mean that these businesses will continue to generate strong levels of cash flow.

Sam Benstead: And of the two giant oil companies, Shell (LSE:SHEL) and BP (LSE:BP.), do you own them both, do you own just one of them, and why?

Richard Buxton: I own them both. It's been remarkable to watch the last couple of years, that Shell was clearly much more advanced in terms of recognising the energy transition and investing in wind and solar and so on. But with the new-ish chief executive of BP, the last couple of years, if anything, they've leapfrogged Shell in the scale of their commitment and that determination to invest in hydrogen and to invest in electric vehicle charging stations and so on. So, no, I've had both because they are acting slightly differently, although in share price terms clearly they're very strongly correlated.

Sam Benstead: You said you're relatively comfortable with the UK economy, but the market is also affected by international factors. So, what is the biggest risk right now for UK investors?

Richard Buxton: Well, the UK stock market has always been, thank heavens, a very internationally orientated one. I mean, 75% of our earnings come from outside the UK. So, we are a good play on global levels of growth and activity. And, clearly, we've got a number of companies that are very specifically Asia-focused, Prudential (LSE:PRU), HSBC Holdings (LSE:HSBA), etc. So, no, I think the risks are on a global front, will the US have to raise interest rates higher than people currently think to slow the economy and rein in inflation? Will that upset the bond market and, hence, valuations in equities? So, the concern that wage inflation at 4%, 5%, 6% may be beginning to get embedded in the US and UK economies. So, inflation is falling, but will it fall all the way back to the 2% targets the central banks have? I'm not sure. And clearly in the UK, we've got a difficult period to go through, so stagnant economic activity, but underlying [that] we've got a huge entrepreneurial dynamic in the UK. We've got strong new business formation. Most people are employed by small businesses here. So, on a medium-term view, and given the valuations in the UK, I'm pretty upbeat about the prospects.

Sam Benstead: You can invest up to 30% of the fund in international shares. Do you ever use that allowance?

Richard Buxton: The rules would allow me to do so, but I never have. I've always gone, well, this is a UK equity fund, I don't feel the need to reach out and invest in non-UK companies. I think there are sufficiently interesting attractive opportunities in the UK itself.

Sam Benstead: And, finally, the question we ask all our guests. Do you personally invest in the fund?

Richard Buxton: Absolutely. I don't invest in individual stocks and shares. All my wealth, apart from my Jupiter shares, is invested in this fund and always has been. I eat my own cooking.

Sam Benstead: Richard, thanks for coming into the studio.

Richard Buxton: My pleasure.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can, like, comment and subscribe. See you next time.

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