Managers like them because they’re highly-rated, defensive companies with solid dividends.
But Martin Currie’s Tom Walker, manager of the Martin Currie Global Portfolio trust, warns these ‘highly-rated’ companies are facing more pressure than the market realises.
“I think the retail market is very tough at the moment,” he said. “Consumer staple companies are having a lot of pushback from distributors. Margins are under a lot of pressure.”
Walker adds the phenomenon isn’t one that just exists in the developed world, arguing that the consumer demand story in emerging markets is also under threat.
“There are very fine margins in these markets as well,” he said. “In companies like Unilever, I can’t find enough excitement in their share prices to find much upside.”
However, in the UK since the start of the year, the FTSE All Share Consumer Goods index has outperformed the FTSE All Share, returning 4.94 per cent while the main index is down 0.38 per cent, according to FE Analytics.
Year-to-date performance of indices
Source: FE Analytics
Walker runs a concentrated portfolio of around 60 stocks in the Martin Currie Global Portfolio trust and with the whole world to look at, he highlights three retail names that are still worth holding.
TJ Maxx
The discount clothing retailer – known as TK Maxx in the UK – is one Walker bought recently because he likes its play on promotional pricing.
“They’ve got fantastic relationships with big branded suppliers. There’s a barrier to entry for anyone else coming in to the market,” he said.
Walker expects the consumer to remain price-conscious and he thinks TJ Maxx is in a unique position to take advantage of the trend.
He adds that there’s plenty of growth potential as the brand expands in to Europe, which currently only accounts for 20 per cent of sales.
TJ Maxx currently operates stories in the US, UK, Ireland, Germany and Poland while also running ‘off-price’ retail chains Marshalls in the US and Winners in Canada.
CVS Pharmacy
Another retail stock the manager is a fan of is US-based pharmacy chain CVS – the second largest pharmacy chain after Walgreens.
“It’s like Boots, but better,” Walker said.
Walker says the company has done a good job creating a “synergy” between its retail store chain and its CVS Caremark business.
The CVS Health Corporation is up nearly 15 per cent so far this year, helped largely by its expansion beyond prescriptions to patient care services. The firm’s returns outstrip those of the S&P 500, which is up 7.63 per cent.
L Brands
The final retail company Walker thinks is worth its salt is L Brands, formerly Limited Brands, famed for its lingerie label Victoria’s Secret.
“The company is growing rapidly internationally through airports and flagship stores,” he said.
Victoria’s Secret opened a flagship branch in London’s West End in 2012. The firm has also been successful with Bath & Body Works, a specialty retailer of shower gels, lotions, perfumes, candles and home fragrances.
While there is plenty of growth potential for the company, Walker says it’s also on attractive valuations.
The company is expected to see earnings growth in the region of 5 per cent next year, while analysts project the retail industry will retract by roughly 7 per cent.
Walker currently favours North American and financial stocks in the £177.5m trust, but he says that’s a virtue of bottom-up analysis rather than a call on regions or sectors.
The four FE Crown-rated trust is yielding 2.35 per cent and has consistently outperformed its peers in the IT Global sector over the last one, three, five and 10 years.
It’s also outpaced its benchmark, the FTSE World index over three, five and 10 years.
Over the last decade, the trust made 172.96 per cent. Peers in the IT Global sector gained 144.73 per cent while the index picked up slightly less, at 134.85 per cent.
Performance of trust, sector and index over 10 years
Source: FE Analytics
The trust is a large-cap focused global portfolio which aims to achieve long-term capital growth in excess of the FTSE World index and is trading on a narrow premium of 0.4 per cent.
In an effort to make the trust more attractive to retail investors, Walker says its board instituted a zero discount policy where the trust will buy back shares when it goes on a discount and issue shares when it goes on a premium to keep the discount around zero.
The manager says the discount policy benefits investors because it reduces the overall volatility of a discount.
“The trust should never go to a big discount or a big premium,” he said.
“Some investors like to play the discount, buying it when it’s wide and selling when it’s narrow, but that’s not the type of investor we’re aiming at. [The trust] is one for long-term shareholders to tuck away in the bottom drawer as a savings instrument.”
Walker says there are three key criteria he looks for when it comes to stock selection – pricing power, visibility of earnings and valuation.
The manager says he would never buy a stock if he didn’t like the management and says company meetings are a key component in his selection process.
The manager also looks for companies with strong cash flow and cash generation and the ability to grow organically by putting their cash to work to fund their own growth.
Among his top holdings are US tech giant Apple, Swiss pharmaceutical stock Roche and insurance group Prudential PLC.
Martin Currie Global Portfolio trust has ongoing charges of 0.8 per cent.
