Royal Mail was launched last year into the public market and surfed a wave of strong investor demand. The shares were widely said to be undervalued at the point of the IPO and are up 70 per cent since then, but Boucher says this strong run will end.
“The one new issue we are short of is Royal Mail,” he said. “I think it’s this factor where when the company comes to market there’s a large roadshow, people have a lot of expectation of management because the brokers are involved and talking to people about it at the time.”
“They have an interest in getting a deal done so only positive news gets into the market.”
“With Royal Mail it was set at a price where it would be successful, but at some time people were over-excited and ignored the things that could go wrong.”
Data from FE Analytics shows the stock has made 17.26 per cent since the frantic first day of trading, but has started to lose money in recent weeks.
Performance of stock vs index since day after flotation
Source: FE Analytics
Boucher says that the stock is still at risk of industrial action in the future, while it is facing structural issues within its industry.
The decline in the volume of letters sent will hurt the stock in the longer run, he suggests, as will the growth of spam email which has taken over from junk mail advertising.
For this reason the manager says the stock is one of the few new short positions in the £46m Smith & Williamson Enterprise fund.
His view contrasts with that of Miton’s George Godber who told FE Trustnet last month that he thought the stock was still undervalued.
The manager says that it is becoming increasingly difficult to find new short ideas. However, he is maintaining his short position in the food retail sector.
“One type of short we look for is the structural short on an industry with strong headwinds, the largest one has been food retailers which is no longer a great secret.”
“Trading at the big four is very difficult, they have over-expanded, let discounters get a hold in the market and they [discounters] are expanding.”
“Plus people’s shopping standards are changing: they are doing a couple of shops a week.”
“Really they let their margins get too high and people are starting to realise that, and they had a lot of offers that weren’t really offers and we are seeing start to go down.”
One reason that the manager is avoiding taking on too many shorts is that he expects M&A to pick up and says this could hurt funds like his that take up short positions.
Targets for M&A tend to be the sort of stocks which he looks for in his short book, with weak management and dull recent performance.
“We are aware we haven’t had a lot of M&A in this cycle and at some stage that will happen,” he said.
“Companies’ balance sheets are strong and earnings growth isn’t easy which usually leads management to look at M&A and they tend to buy those companies that haven’t performed very well.”
Boucher explains that this dynamic hurt his fund in the last M&A burst of 2006, when he took up positions in stocks he thought were weak only to see them get a boost as they were bought up.
However, he has maintained a short position on the outsourcing sector, betting against G4S and Serco.
The companies have both suffered badly in the wake of scandals over government contracts and are down over one year.
Performance of stocks vs index over 1yr
Source: FE Analytics
“With the election imminent parties want to save costs and don’t want to give contracts to companies like G4S which aren’t very popular with the public,” he said.
The Smith & Williamson Enterprise fund sits in the IMA Targeted Absolute Return sector and uses long and short positions to eke out returns. It has a bias to the long side, generally remaining net long 20 per cent.
The portfolio did exceptionally well in 2008, returning 16.3 per cent as the index lost 32.8 per cent.
Performance of fund vs index since launch
Source: FE Analytics
Boucher explains that he was short not only the banks but also many of the most indebted companies on the market as he foresaw the problems brewing.
However, it took a lot of self-control to hold on on the way down, he explains, as many of the stocks such as RBS which fell sharply rallied sharply on a number of occasions.
In 2011 the fund wasn’t so successful in protecting against the downturn, however, falling slightly further than the index.
Boucher says that this market correction being based on the political crisis in the eurozone was harder for investors to foresee.
Over the past three years the fund has made 11.02 per cent as the average IMA Targeted Absolute Return fund is up just 8.66 per cent. The FTSE All Share is up 27.32 per cent over this time.
The fund’s volatility of 7.12 per cent very that time is midway between the 2 per cent of the sector and 14.87 per cent of equities. It has ongoing charges of 0.96 per cent.
