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Tate and Rolls-Royce wipe out Buxton’s recent outperformance

Tate and Rolls-Royce wipe out Buxton’s recent outperformance

The recent outperformance of Citywire AA-rated Richard Buxton’s £1.2 billion Old Mutual UK Alpha fund has been erased by the weakness of his holdings in Tate & Lyle and Rolls-Royce.

Both disappointed the market with updates on 13 February, knocking 18% off shares in both groups. ‘It never rains but it pours,’ Buxton (pictured) said.

UK Alpha had been performing in line with its FTSE All Share benchmark until the two stocks plunged, but Buxton revealed in a call with investors that the fund has now lagged slightly this year. In 2013 the fund returned 31.1% compared with the index’s 20.8% rise.

However, Buxton maintains his confidence in both positions.

On Tate & Lyle, Buxton noted that the problems arose from Chinese competition on the price of sucralose. ‘When you have possibly slightly irrational players, it’s not easy to be able to adduce with confidence that you can see an end to this,’ he said.

‘It’s not impossible that this continues to be a degree of a drag on the returns.’

Nevertheless, Buxton argued that that his medium-term investment remains intact given that Tate & Lyle is minimising the commoditised sucralose element of its business and is growing its speciality ingredients line, with several new products near launch.

‘On an 8% free cash flow yield, we think now is absolutely not the time to be abandoning this,’ Buxton said. Indeed, he expects to add to his stake if the shares drift to a 9-10% free cash flow yield.

With Rolls-Royce, Buxton noted that the company still boasts a strong aerospace arm and ‘massive’ order book, blaming the share price dip on several other factors.

First, Buxton said that speculation over the acquisition of Wärtsilä had given hedge funds the ‘perfect opportunity’ to short Rolls-Royce and go long the Finnish engineer in a classic merger arbitrage trade.

Second, he observed that concerns about Rolls-Royce’s accounting practices are a longstanding issue and periodically a source of investor anxiety. Buxton believes that this will only be a temporary weight on the shares, though.

‘It is the nature of the business that over the course of time they can more or less declare whatever level of profits they want.’

Finally, Buxton lamented the fact that Rolls-Royce’s dealings with shareholders had not been more accommodative. ‘It has not been helped by the way in which they are slightly high-handed in terms of their investor relations,’ he added.

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