Colwell, co-manager of the Threadneedle UK Equity Income fund alongside FE Alpha Manager Leigh Harrison, is buying into the FTSE 100’s second worst performing stock this year due a belief that a series of reforms and changes in strategy should help it bounce back from its dreary performance.
According to FE Analytics, the stock has lost 34.93 per cent over the past year. By comparison the FTSE 100 has rebounded 5.71 per cent.
Performance of stock and index over 1yr
Source: FE Analytics
Colwell, speaking at the FE Select 100 UK Equity Income event, said: “Morrisons remains in quarantine but we bought a lot more in the last four months and we feel a lot more comfortable with the strategy. I was very pleased with the change in the chairman, who describes it as his dream job.”
“This isn't a 100 per cent recovery fund [but] it is a contrarian fund where we think we can afford to take on a few of those sort of stocks and hope they can come through and do a job in the way that BT and ITV and the like have done in the last few years.”“Some stocks such as ITV you may not associate with an income fund but pay special dividends alongside a growing dividend. We want to buy and hold and when we become comfortable, increase the position. You need something like this to outperform, you can't just mimic what others are doing.”
As well as Colwell, Royal London's Martin Cholwill, Schroders' Matt Hudson, Henderson’s James Henderson and Unicorn's Simon Moon and Fraser Mackersie spoke at yesterday's FE Select 100 event. Delegates included co-manager of the F&C multi-manager range Gary Potter and Hawksmoor's Richard Scott.
Colwell says Morrisons now accounts for 2.5 per cent of the £3bn Threadneedle UK Equity Income fund, approximately 0.18 per cent of the company.
The negative market sentiment driving Morrisons’ share price decline centres around its failure to keep pace with the rise of online shopping, as well as the erosion of its market share from the likes of discounters Aldi and Lidl.
Tesco has also seen a sharp decline its share price driven by four consecutive earnings downgrades and its latest hurdle - accusations of accounting irregularities stemming from an over forecast of its expected earnings by £250m.
Colwell expects there may be similar problems with other large supermarkets but not at Morrisons.
“The accounting irregularities were going on elsewhere in the sector. Morrisons, because at this time last year was still on paper invoices, have only just got around to engaging with their supplier base and get better terms to improve their cash flow.”
“That is part of the prize, because it has been so poorly run. Ken Morrison was a brilliant retailer back in the day but like a lot of brilliant guys he outstayed his welcome a bit. The Safeway deal nearly broke the business and unfortunately they have not invested in the systems.”
“I am very confident about the cash flows of Morrisons. The issue is that the market doesn't believe them that having reset the business the margins will recover.”
Colwell has been co-manager of the fund since October 2010.
The fund has returned 65.4 per cent compared to an IMA UK Equity Income sector average of 50.14 per cent since then. The FTSE All Share has gained 42.1 per cent over the same period.
Performance of fund, sector and index since Oct 2010
Source: FE Analytics
He says the key to the market re-rating Morrisons will be an improvement in its margins as well as driving volume growth.
“All the margins are now down at 3 per cent - like a distributor. Actually if you strip out the fact that they are the second biggest food manufacturer in the country, that is where they are earning most of their margin.”
“The like for like is more like 1.2 per cent, so they have taken a lot of pain. The issue is whether they will get traction and get volumes back into the business.”
“Clearly they are not going back to the margin structure they had but it is about the market recognising that are a mature industry and can generate cash. All of the capital that was deployed at poor returns, they need to move away from that. There are analogies with the mining sector.”
‘Star’ contrarian manager Alastair Mundy, who runs the £1.2bn Investec UK Special Situations fund, also bought back into the supermarkets earlier this year.
The manager thinks the competition from the discounters has been exaggerated and sent the stock to an unfair discount relative to the market.
