The online retailer warned in a recent trading update that profits would be lower than expected. Then half-year results, released on April 2, reported pre-tax profits down more than 20 per cent, to £20.1m.
As a result, the stock has shed 26.15 per cent off its share price this year, falling behind the FTSE AIM index, which is down 0.53 per cent year to date.
Year-to-date performance of stock vs index
Source: FE Analytics
However, Duncan, who holds ASOS as her largest holding in the SLI UK Ethical fund, says now isn’t the time to panic and sell out.
One reason ASOS says it expects lower profits is due to a significant investment programme aimed at growing its warehouse capacity and IT capabilities. Revenues were actually up 35 per cent.
“The increased level of investment is to do with taking them to the next level,” she said. “They did a similar investment programme three years ago and the shares reacted quite badly. Over the short term it was taken poorly in terms of share price but we think it is the right thing to do.”
Mileva, who is an investment analyst on the Baillie Gifford UK Equity Alpha fund, agrees.
“We genuinely think [ASOS] is an investment for the long run because of its vast opportunity set,” she said. “We’ve held ASOS since October 2010. [Over that time] it’s amazing to see the transformation they’ve achieved.”
ASOS is currently the second-largest holding in the Baillie Gifford fund, making up 6.5 per cent of the £106.4m portfolio.
Mileva thinks the company has plenty of room to grow its revenue and profits as it invests in expanding its business into ever wider markets such as the US and currently untapped Asian consumer, particularly in China.
The Baillie Gifford UK Equity Alpha fund, which is headed up by Gerard Callahan, also has online food retailer Ocado and property listing website Rightmove in its top-10 holdings.
Over the long-term, ASOS has truly been a Cinderella story for investors. Though it has seen a sharp selloff in recent months, the stock is still up 19,144.59 per cent since it listed in October 2001.
The FTSE AIM index is comparatively flat over the period, having gained a meagre 17.51 per cent, according to FE Analytics.
Performance of stock vs index since Oct 2001
Source: FE Analytics
Duncan and Mileva’s view contrasts with that of AIM expert Paul Mumford who told FE Trustnet recently that he didn’t think the stock was attractive.
In spite of their long-term confidence, neither manager are using the depressed share price as an opportunity to buy more of the stock as it is already a large position in both funds.
But they say they aren’t selling out either, preferring to hold on and ride what they expect to be continued growth from ASOS.
In addition to the SLI UK Ethical and Baillie Gifford UK Equity Alpha funds, 11 funds in the IMA universe hold ASOS in their top-10. Among them are FE Alpha Manager Harry Nimmo in his flagship SLI UK Smaller Companies portfolio and FE Alpha Manager Giles Hargreave and Siddarth Chand Lall in the Marlborough Multi Cap Income fund.
Both the Baillie Gifford and SLI funds have seen a dip in their short-term performance, in part due to their exposure to ASOS. However, over the longer term both funds have beaten their peers and benchmarks.
Baillie Gifford UK Equity Alpha, for example, is up 123.18 per cent over the last five years. The IMA UK All Companies sector made 118.82 per cent and the FTSE All Share gained 108.88 per cent.
The SLI UK Ethical fund, which is benchmarked against the IMA UK Ethical sub sector, has also delivered strong performance over the long term.
The £213.6m fund has delivered top-quartile returns over one, three and five years, picking up 156.01 per cent over the latter period.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Duncan says her outperformance is down to rigorous stock selection and Standard Life’s in-depth research capacity.
“We cover stocks in the UK market whether we own them or not,” she said.
However, as she runs an ethical portfolio, there are a number of filters companies have to pass in order to meet the ethical and sustainable criteria.
Duncan says she excludes firms with poor human rights track records, those involved in the production and sale of weapons, any companies which own or operate nuclear power or firms involved in animal testing.
“If it doesn’t have these, it isn’t viewed as acceptable and we wouldn’t be able to invest in it,” she said.
The Standard Life UK Ethical fund has ongoing charges of 0.9 per cent. Baillie Gifford UK Equity Alpha has ongoing charges of 0.69 per cent.
