The UK has emerged from the pandemic as the land of “outstanding opportunities”, according to AXA Investment Managers’ Dan Harlow. .jpg)
The UK market experienced heavy losses in the midst of the Covid-19 sell-off last year but is now undergoing a strong recovery, fuelled by its successful vaccination roll-out allowing the easing of Covid restrictions.
This has created opportunities in sold-off, domestic-facing sectors such as retailers and leisure names, Harlow said. These are companies he has invested his AXA Framlington UK Smaller Companies fund in, a portfolio he runs with FE fundinfo Alpha Manager Chris St John.
Hollywood Bowl
One stock is Hollywood Bowl, primarily a 10-pin bowling alley chain but also hosts arcades and virtual reality games.
The company is well placed to take advantage of the available retail space landlords are “desperate to fill”, Harlow (pictured) said.
The company has been able to raise capital in the past year so has the liquidity to invest in this type of expansion. In addition, a “favourable backdrop” of the UK reopening and foreign travel limited for the next year means consumers will be spending more time in the UK with more cash and play out well for the company, which has seen its competitors “vanish”, Harlow said.
Stock performance over 5yrs
Source: FE Analytics
Gym Group
Another company benefitting from the above dynamics is Gym Group, a budget gym membership.
After months of forced closure during the lockdowns, gyms have reopened and benefitted from a rush back from members and new joiners.
Like Hollywood Bowl, Gym Group survived the headwinds of both the lockdown and the following recession, emerging in a strong position to gain market share, Harlow said.
The company is the 10th biggest holding in the AXA Framlington UK Smaller Companies fund.
Stock performance over 5yrs
Source: FE Analytics
Loungers
The next stock is Loungers, a café, bar and restaurant that Harlow has been invested in since IPO two and a half years ago.
Although a longer-term stock in the fund, it has emerged as a reopening winner for Harlow having captured and retained its customer base during lockdown.
He explained that the company “tastefully” managed the lockdown and social distancing restrictions, avoiding large Perspex barriers for more ‘natural’ ones and making web ordering easier, requiring no app to download.
Since reopening in May, Loungers has reported strong trading, an anomaly in its consumer space, which had generally been reporting a downgrade in trading. “They're materially outperforming and I just think it speaks to their offering,” Harlow said.
The company is also planning to expand, taking over sites previously rented by Maplins, Pizza Express and CVA, which all suffered some permanent closures due to lockdown.
“Just like Gym Group and Hollywood Bowl, they're benefiting from real estate opportunities presenting themselves,” the manager added.
Stock performance since IPO
Source: FE Analytics
DFS
Moving away from external leisure and into the home, the final company is DFS Furniture, a furniture retail company that is benefitting from the ‘home investment’ trend.
Harlow explained that after months of lockdown and spending so much time at home, people have had the chance to reevaluate their domestic space, spurring a spree of refurbishment, decoration and building. This is still “very strong” at the moment.
For DFS, this has been complemented by the reopening of non-essential retail as customers generally like to see and touch a potential major home purchase in the store.
Harlow said the combination of pent-up capital and consumer confidence should benefit the company.
DFS also owns couch brand Sofology, giving it a 35% market share of this space. This means it is well placed to capture all the benefits mentioned above.
Owning Sofology means DFS also has the extra capital to run advertisement campaigns. The most recent one was becoming a partner with Team GB for the Tokyo Olympics.
Another major pro for the brand is that a lot of its production is onshore, Harlow said, a benefit since international supply chains seeing prices increase and freight rates especially have increased since Brexit.
Stock performance over 5yrs
Source: FE Analytics
“We think all of them are going to continue to take the market share because the competition is more capital constrained, more encumbered by legacy, or just can't invest in growth at the same pace,” Harlow said of all four names.
One of the key challenges facing all of them - and companies in general - is managing inflation pressure. The UK has second the consumer price index (CPI) hitting 2.5% in June, up from 2.1% in May and higher than the Bank of England’s 2% target.
For Harlow pricing power is a key part of his AXA Framlington UK Smaller Companies fund, which become especially important if inflation rises.
“We will soon discover who is able to successfully achieve this,” Harlow said.
“However, smaller companies generally have been particularly conservative in their earnings outlook, and we are encouraged that the mantra of ‘under promise, over deliver’ is largely being adhered to.”
Performance of fund over 10yrs
Source: FE Analytics
Over 10 years the AXA Framlington UK Smaller Companies fund has made a total return of 385%, outperforming both the IA UK Smaller Companies sector and the FTSE Small Cap ex Inv Co index.
The fund has an ongoing charges figure (OCF) of 0.84%.