Issue 37 / February 2018 FOLLOWING AMAZON PRICE AND PREJUDICE KEEP IT GROWING

36 Pages·2017·11.19 MB·English

Issue 37 / February 2018
FOLLOWING PRICE AND KEEP IT
AMAZON PREJUDICE GROWING
Tapping the Is value making a The case for taking
e-commerce boom comeback? risk in retirement
EDITOR’S LETTER
Issue 37 / February 2018
T HE BEST-PERFORMING STOCK ON THE
FTSE ALL SHARE LAST YEAR wasn’t the
UK’s answer to Facebook or Google, nor was it
a miner riding a price rebound in its
underlying commodity. Amid all the talk of a sector in
long-term decline, the index’s top-performer in 2017 was
actually high-street stalwart Games Workshop, with gains
FOLLOWING PRICE AND KEEP IT of more than 300 per cent. While the manufacturer of fantasy board games is
AMAZON PREJUDICE GROWING
Tapping the Is value making a The case for taking
e-commerce boom comeback? risk in retirement by no means a typical store and it makes approximately 70 per cent of sales
from overseas, it still demonstrates what investors could be missing out on if
ISSUE 37 they tarnish an entire sector with the same brush, as Rebecca Jones finds out
in this issue’s cover feature.
If you like the idea of finding value in out-of-favour stocks, the
good news – according to an article from Cherry Reynard – is that
the conditions look extremely favourable for this type of investing.
CREDITS
However, Adam Lewis says the bad news is that all the easy gains in UK
small caps, which have a higher exposure to the UK consumer, may
have already been made. I look at the other side of the coin as I search for
TRUSTNET MAGAZINE (FORMERLY the best way to tap into the unstoppable rise of internet shopping.
INVESTAZINE) IS PUBLISHED BY In our regular columns, John Blowers floats the idea of maintaining
THE TEAM BEHIND FE TRUSTNET IN
the same level of risk throughout your retirement, MitonOptimal’s
SOHO, LONDON.
Paul Warner reveals why he is adding Montanaro UK Income to his SRI
WEBSITE: WWW.TRUSTNETDIRECT.COM Balanced Growth portfolio and Gervais Williams names three stocks he
EMAIL: [email protected] is backing in another out-of-favour sector – oil.
CONTACTS:
Enjoy reading,
Anthony Luzio
Editor
T: 0207 534 7652
Art direction & design
Javier Otero
W: www.feedingcrows.co.uk
Editorial
Gary Jackson
Editor (FE Trustnet)
T: 0207 534 7680
Rob Langston
News editor
T: 0207 534 7696
Lauren Mason
Senior reporter
T: 0207 534 7625
Jonathan Jones
Reporter
T: 0207 534 7640
Sales
Richard Fletcher
Head of publishing sales
T: 0207 534 7662
Richard Casemore
Account manager
T: 0207 534 7669
Photos supplied by Thinkstock In association with:
and Photoshot
Cover illustration: Javier Otero
IN THIS ISSUE
8
22
28
DEATH OF THE HIGH STREET Rebecca Jones says the long-term decline of traditional retail doesn’t make
it a no-go area for investors P. 2-5 / AIM FOR THE STARS James Henderson believes the AIM index contains
the next generation of UK companies that could drive the economy for years to come P. 6-7 / PRICE AND
PREJUDICE There are signs the out-of-favour value strategy is coming back into fashion, writes Cherry
Reynard P. 8-10 / REGARDS FROM SHANGHAI Scottish Mortgage Investment Trust’s James Anderson says
Alibaba represents the future of retail P. 12-13 / FOLLOWING AMAZON Anthony Luzio seeks out the best
way to tap the e-commerce boom P. 14-16 / FUND, PENSION, TRUST Polar Capital UK Absolute Equity, F&C
Responsible Income and Capital Gearing Trust find themselves under the spotlight this month P. 18-20 /
MISSED THE BOAT? Anyone who thinks Brexit worries have created a value opportunity in UK small caps may
be a year too late, warns Adam Lewis P. 22-26 / KEEP IT GROWING The notion of de-risking your pension pot
as you approach retirement may have had its day, writes John Blowers P. 28-31 / WELL-OILED Miton’s Gervais
Williams names three oil producers set to benefit from the commodity’s price recovery P. 32 / WHAT I BOUGHT
LAST MitonOptimal’s Paul Warner says Montanaro UK Income is suitable for the group’s SRI portfolios even
though it isn’t marketed for this purpose P. 33
YOUR PORTFOLIO
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/ UK RETAIL /
The retail sector as we know it is
changing beyond all recognition,
but this doesn’t make it a no-go
area for investors, writes
Rebecca Jones
K RETAILERS AREN’T HAVING A
U
GREAT TIME OF IT. Over the past
decade, brands once synonymous with
everyday British shopping habits – from
Marks & Spencer to Tesco to department
store goliath Debenhams – have reported sales figures
that have become weaker and weaker. Despite a
difficult backdrop, however, some unexpected
winners are beginning to emerge in this new retail
landscape – if you know where to look.
ONLINE OR BUST
The arch nemesis of the high street is, undoubtedly,
the internet. Online retailers have made sourcing and
purchasing even the most obscure items effortless,
leaving little reason for consumers to tackle high street
crowds. Areas that have been hit particularly hard
by this trend include books, media and electronics
– products that arguably only the most eccentric
consumers refuse to source from Amazon or iTunes.
The demise of entertainment retailers including Virgin
Megastores (later Zavvi) and HMV between 2009 and
2014 is testament to this, while Dixons is clinging on by
its fingernails after the collapse of Comet in 2012.
Fashion retailing is one of the more recent victims.
An area once thought to be safe from the online
juggernaut due to the vagaries of size and fit that
were most efficiently navigated onsite has been
transformed by companies making it easier than
ever to find the perfect outfit. Keith Ashworth-Lord,
manager of the Sanford DeLand UK Buffettology
fund, explains: “In fashion, the trend is absolutely
away from bricks and mortar, towards online. I only
have to look at my daughter who orders three sizes
of something then sends two back the next day to see
that. When the market cap of ASOS overtakes Marks
& Spencer, that tells you something.”
While fending off the internet giants, high street
retailers have also had to contend with rising rents.
Ashworth-Lord says that property values in many
prime central retail locations have rocketed, hurting
larger firms with big stores such as M&S, Debenhams
and House of Fraser (the latter two recently issued
crippling profit warnings). According to Gervais
Williams, manager of the Miton UK MicroCap trust,
this has compounded other cost concerns: “We’ve
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been very cautious on this sector
for a long time – there are a lot of
headwinds. In the UK we’ve got the
minimum wage rising quite fast
at the moment, which affects a lot
of counter staff at retailers, adding
more pressure.”
POUND SALE
In addition to these longer-term
challenges, the UK’s vote to leave
the EU in June 2016 – and the
subsequent sharp devaluation of
the pound – has hurt businesses
across the board, although once
again, it’s retailers that are taking the
heat: “I think sterling was overdue
a correction, but for businesses that
import a lot of what they sell – and
that is predominately retailers – that
has been a problem, without doubt,”
says Ashworth-Lord. Williams
concurs, adding the currency hedges
that savvy importers may have
purchased pre-Brexit will now likely
be expiring, adding further cost-woe
for some retailers.
Perhaps more important,
however, is the effect that “Games Workshop is totally fan-
shrinking sterling has had on the
UK consumer. Inflation has been based. The people that buy this
glued to the floor since the Bank
of England embarked on its titanic product would find this store if it
monetary stimulus programme in
was 100ft underground”
2009, however Brexit has pushed it
back up to pre-crisis levels of more
than 3 per cent. While this in itself
is not bad news, wage stagnation back-to-basics German discounters SURVIVORS AND THRIVERS
has provided a double whammy: Aldi and Lidl have stolen a march Despite all this doom and gloom,
“Simply put, wages are not rising on British stalwarts such as Tesco managers insist there is hope for
as fast as prices and that squeeze is and Sainsbury’s. Williams explains: Britain’s high street retailers. Perhaps
onerous. Sterling has strengthened “It used to be that people looked for unsurprisingly, one of the most
of late, but despite this – and rising the widest range. Now many are important survival factors is an
employment – the consumer is happy with smaller local retailers online offering. Ashworth points
struggling,” says James Henderson, [where] you don’t need to choose to Next – one of the few fashion
manager of the Henderson from 15 types of pepper.” retailers that is holding up in the
Opportunities Trust. While this has not yet extended current environment – as a case
Even more worrying for far beyond groceries, Williams in point: “The trend is very clearly
investors, though, is the most says this could be a trend to watch: towards online and what we have
recent trend to emerge among “There’s a pattern where people are to look for as investors are the
consumers: that of not – in-fact – getting tired of having too many businesses that are best placed to
consuming. This is most evident things. I think they are changing withdraw from the high street. For
in the supermarket sector, where their behaviour a bit.” me, Next fits this bill. The average
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/ UK RETAIL /
there are plenty of bricks and In no company is the specialist
mortar retailers that are growing dynamic more evident than fantasy
– and playing to the consumer board game manufacturer Games
squeeze is key. His holdings in Workshop – the best performing
Shoezone, convenience store chain stock on the FTSE All Share last
McColl’s and Bargain Booze-owner year – and a standout performer
Conviviality have performed well for Ashworth-Lord: “That is really
thanks to a combination of renting specialist and totally fanbased.
units in cheaper areas, discounting The people that buy this product
and an astute awareness of would find this store if it was 100ft
customers’ needs. Matt Hudson, underground.”
co-manager of the Schroder UK As Games Workshop shows, a
Opportunities fund, points to B&M strong brand encouraging a loyal
– an everyday essentials retailer customer base still has a role to
that is expanding fast: “B&M is play in retailing – despite price
putting down more space, but it becoming ever more important.
buys in bulk and sources well from For Hudson, urban streetwear
Asia. It’s a price-competitive model label Superdry is another good
set up to ensure that low price is example. Launched in 2004, the
passed on to consumers, and they brand has grown through the
seem to like that.” label-love of the mid 2000s to
emerge as a staple for mid-level
SPECIAL SAUCE consumers, while its expansion
Businesses that provide specialist into Asia and the US is providing
products and services are also more support. “In the UK, [Superdry]
likely to thrive and Henderson and only has 100 stores, but the real
Hudson point to Halfords as an strength has been the way it has
example: “Halfords is a destination distributed the brand globally.
rental lease on its stores is around if you want to motor or bicycle, so It’s on trend with the growth of
seven years, so it can get out pretty it has a role as a high street retailer athletic leisurewear and we’ve
quickly, while it is growing purely as it is not something that’s easy seen lots of stocks in that area do
through online sales.” to do online. Specialists can buck really well,” Hudson says.
Shutting up shop isn’t the only trends more easily than generalists,” The future of UK retailers is
option. As Henderson observes, Henderson argues. perhaps more uncertain than it
has ever been. The pace of growth
in online retail has caught many
investors by surprise and if Moore’s
PERFORMANCE OF STOCKS VS INDEX IN 2017
Law is anything to go by, it’s not
going to slow down. The more
350% Games Workshop (311.01%) short-term headwinds buffeting
300% ConvivialityRetail (93.93%) the sector – namely the post-Brexit
consumer squeeze – will die down.
250% McolsRetail (48.84%)
However, retailing is going through
200% FTSE All Share (13.10%) a fundamental shift and investors
150% must ensure they pick the winners.
Hudson summarises: “The most
100%
important thing is that retailers
50% acknowledge these changes in
0% consumer behaviour, how they
impact their businesses and have
-50%
Jan17 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec tchhea lflleenxgibei.l Tithyo tsoe t tahkaet o cna nth eamt brace
Source: FE Analytics the change will survive.” 
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For promotional purposes
AIM FOR
THE STARS
James Henderson of the Henderson Opportunities Trust says
the AIM index contains the next generation of UK companies that
could drive the economy for years to come
T HERE ARE ALWAYS strong headwinds, with a companies such a good hunting
MONEY-MAKING slowdown in economic activity ground for opportunities, despite
INVESTMENT predicted. There is also the the economic backdrop. ASOS had
OPPORTUNITIES structural challenge caused by a value of a few million pounds in
waiting out in the yesterday’s strong franchises 2005 and it now has a market value
market and it is only lack of rapidly being reduced to today’s of £5bn (Source: Bloomberg, February
imagination and idleness that stop tired business models. 2018). It is still listed on AIM.
us professional investment Think how Ladbrokes Many of the new, young
managers from taking them. This is dominated the betting market companies on AIM will fail but
a fact I have needed to remind only for its market share to this will primarily not be the
myself about in recent months. The be eaten away by the online fault of the economy – rather
UK can appear depressing with the platforms or the way internet their inadequacies as a business.
Brexit debate ratcheting up to the clothes retail business ASOS went In the same way the winners will
point of angry disagreement in from a start-up to having a market succeed because of their own
which everyone will be a loser and capitalisation nearly the same as efforts and excellence of product.
where real wages are falling. The Marks and Spencer. It is refreshing every time to meet
large consumer stocks, property It is the rapid speed of change and talk to a new young company
companies and utilities are facing that is making some AIM-listed on AIM.
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/ JANUS HENDERSON /
For a start, Brexit is unlikely to in the early days with absurd There will be many
be mentioned. The successes come valuations that proved to be disappointments, but the next
in many different areas of activity. businesses of no value, followed by a generation of dynamic UK
Tonic water producer Fevertree mining boom when the hype did not companies that will play their
and robotics company Blue Prism match the reality, resulting in heavy part in driving the UK economy
were two of the stars last year, while losses for investors. These two events forward, regardless of Brexit and
Scapa, an industrial tape company, dragged down the AIM returns. politicians, can be found on the
and Johnson Services, a laundry The returns since the 19th year over one thousand companies
business, have given very strong anniversary have seen substantial that are on AIM. AIM can
returns recently. Success, like failure, growth driven by a diverse range of therefore play an important part
comes in many different areas. An stocks (see bottom chart). in a well-balanced portfolio.
interesting characteristic of Scapa
and Johnson Group is that they
were both once quoted on the main
PERFORMANCE OF INDEX MAY 1997 TO MAY 2016
market. They had become problem-
riddled old companies, but the
move to AIM and new management 300% FTSE AIM All Share -TOT Return IND (Rebased 100)
teams meant they rediscovered their
250%
purpose and drive. This shows it
is not only young companies that 200%
succeed on AIM, old companies can
150%
reinvent themselves. It is the lighter
regulations and lower costs that 100% -21.6%
mean some companies leave the
50%
main market to join AIM and these
can be important factors in their 0%
recovery plans. May97May98May99May00May01May02May03May04May05May06May07May08May09May10May11May12May13May14May15May16
What, therefore, is the process for
finding a successful investment on
Source: Datastream, as at 12 May 2016. Rebased to 100, as at 12 May 1997
AIM? Given there is no blueprint
for success, there is no process for
finding a successful investment
PERFORMANCE OF INDEX MAY 2016 TO NOV 2017
other than doing the research. If you
stay open to new ideas and then see
a lot of companies already quoted 160%
FTSE AIM All Share -TOT Return IND (Rebased 100) +44.5%
on AIM or coming to AIM every 150%
so often, through elements of luck 140%
and hard observation, the successful 130%
investment will be found.
120%
AIM has had a good year but this
110%
has not always been the case: in fact
100%
the AIM index was down from its
90%
launch in 1997 to May 2016 (see
80%
chart top-right).
The reasons for this were that May16Jun16Jul16Aug16Sep16Oct16Nov16Dec16Jan17Feb17Mar17Apr17May17Jun17Jul17Aug17Sep17Oct17Nov17
investors had chased fashion. There
were too many tech companies
Source: Datastream, as at 21 November 2017. Rebased to 100, as at 12 May 2016
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trustnet.com 7
YOUR PORTFOLIO
PRICE
AND PREJUDICE
Cherry Reynard says there are signs the out-of-favour
value strategy could be coming back into fashion
T t has been an growth when it was hard to come Estimates suggest that the
uncomfortable time to by in most other areas of the consumer discretionary sector
be a value manager market. At the same time, banks is now trading at a discount
and even the most and mining companies have of around 25 per cent relative
ardent followers of the appeared too precarious for most to industrials, yet there is no
discipline may be wondering investors’ tastes. meaningful difference in earnings
whether it has had its day. After The question then, with many growth or future prospects.
almost a decade when the value of the factors that have driven the Value has started to fare better
style has lagged its peers, is it time outperformance of growth styles since the start of 2018, but Stephen
to admit defeat? Or could it be that reversing, is whether this will Peters, portfolio manager at
the underperformance is simply change as the environment does? Barclays Wealth and Investment
down to monetary policy and the The US 10-year treasury yield, for Management, points out that
scales will start to tip back now example, is now edging towards 3 January 2017 saw a similar trend
that interest rates are rising? per cent, having been as low as 2 before growth reasserted itself.
Over the last 10 years, the MSCI per cent in September 2017. This At the same time, markets have
World Value index has delivered means risk-averse investors no shown that they can be insensitive
a total return 125.26 per cent, longer have to look to the equity to valuations for extended periods.
compared with 183.56 per cent market for income.
from the equivalent growth index. TURNING THE CORNER
Against an uncertain economic FAVOURABLE CONDITIONS Nevertheless, asset allocators are
backdrop, investors have favoured At the same time, economic starting to adjust their portfolios
reliable growth with little concern growth is no longer scarce. The and there is a recognition the
for how much they paid for it. IMF recently upgraded its global environment may have finally
Few were willing to take a risk on growth forecast to 3.9 per cent, turned. James Klempster, head
unloved “value” names, such as aided by US tax cuts and a buoyant of portfolio management at
banks or mining companies. Chinese economy. Companies are Momentum Global Investment
generally operating in a favourable Management, says he normally
PROXIES environment, meaning investors maintains a balance between
Certainly, the monetary should no longer have to pay equity and growth styles in
policy environment has been higher prices for growth stocks his portfolios, but is starting
contributory. Falling interest rates when “weaker” companies are also to tilt them towards value:
and the resulting low bond yields delivering the goods. “Growth has been at the fore for
have made bond proxy sectors This can be seen in the valuation a number of years and has had a
attractive. This has driven the differential between sectors phenomenal time, but is now quite
performance of companies that such as consumer discretionary concentrated and value has been
delivered dependable earnings companies and industrials. left behind – it is bifurcated.”
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