The UK consumer sectors are home to the best examples of long-term ‘all-weather stocks’ despite their recent surge in popularity, according to Nigel Kennett (pictured). 
The manager, who co-runs the £536m CF Canlife UK Equity fund alongside Daniel Monks, adopts a predominantly bottom-up stock selection process but complements this with a top-down view.
Because of the volatility experienced in markets over the last year though, he says that now is a particularly important time to focus on macroeconomics when managing a portfolio.
Many UK investors have adopted a more bearish approach since the start of 2015, following the high volatility of the FTSE 100 and FTSE All Share indices, which ultimately experienced a flat end to the year.
Performance of indices in 2015
Source: FE Analytics
Kennett believes that those who are erring on the side of caution have plenty of options available to them, and that they simply need to know where the right opportunities lie.
“We can go through this by process of elimination,” he said. “For me, there is no way that oil and mining companies are all-weather stocks, and that knocks a big chunk of the market out straight away. I don’t think the banks are either, as they’re very prone to government intervention and regulation, so we’re also very underweight this sector.”
Banks have divided opinions among investors following accusations that they are opaque industries, but some value managers including Investec’s Alastair Mundy believe that the stocks have already endured a great deal of pain and could well bottom out at some point.
However, Kennett says that banking stocks are prone to government intervention and regulations as well as substantial fines, which are large enough to make hefty dents in the stocks’ balance sheets.
“You get numerous scandals with the banks themselves of course, and you only ever find out about these things after the event,” he explained.
“It’s a bit similar to the argument with oil & gas and mining. With some of these variables, we simply don’t have enough insight. I take the view that if we don’t have enough insight on something and therefore we don’t have enough conviction, we can’t really argue logically to have a weighting or if we do it’s only small or in the tactical area of the portfolio.”
CF Canlife UK Equity consists of two buckets – the core of the portfolio which will hold between 70 to 90 per cent of stocks at any one time, and the shorter term tactical positions which can consist of a weighting between 10 and 30 per cent.
While significantly underweight, the fund has small holdings in the oil & gas and financial sectors, but Kennett says these are cyclical, short-term plays.
In terms of steady, long-term investments, the manager explains that once banks and oil & gas stocks are taken out of the equation the team is left with a choice between utilities, telecoms and consumer areas.
“There are pharmaceuticals, but you still have to be careful there because they obviously invest huge sums in research and development and into new drugs and products,” he pointed out.
“Of course a lot of them do go wrong and that causes problems with the share price. You do get volatility around it so I don’t think they’re quite as good. I’ve considered them but I would put them slightly lower down the pecking order.”
“I think utilities are all-weather stocks, and we like water in particular as well as electricity. They’re ‘Steady Eddie’, they’re always here, they pay nice dividends and compound that out, so I think you can consider them to be all-weather stocks.”
However, Kennett says that the best long-term plays are likely to be found among the consumer sectors. The area has been immensely popular among UK investors recently as a result of the low oil and commodity prices providing consumers with greater spending power.
This sentiment isn’t shared by everyone though, with Tilney Bestinvest’s Gareth Lewis telling FE Trustnet earlier this week that the aging demographic and a lower quality of borrowing in developed markets is likely to counteract this.
Kennett argues that, while some consumer stocks are highly cyclical and dependent on macro factors, there are plenty of companies that will thrive despite potential headwinds.
“What we’ve tended to go for is the more gentle consumer cyclicals as opposed to the really hard ones,” he explained.
“We like stocks like Whitbread. It’s market leader in the UK with things like Costa Coffee which is fantastic, and it’s market leader with Premier Inn, those are its two core businesses. They both provide structural growth, albeit they’re both slightly cyclical (the hotels more so) as opposed to tobacco, for instance, which is not cyclical in any way.”
Tobacco is another area within the consumer sector that the manager says is a good option for investors. Currently, CF Canlife UK Equity’s second-largest weighting is in Imperial Tobacco group at 5.2 per cent.
While Kennett admits the stock won’t shoot the lights out in terms of growth, he says that it adds extra stability to the fund’s portfolio.
“The demand is there whether the economy is booming or whether it’s going to oblivion, it’s very stable. With the food companies such as Unilever, the food manufacturers, are very stable as well,” he said.
Performance of indices over 10yrs
Source: FE Analytics
“The problem with tobacco is of course the ethical issues that go along with it, which some people are very concerned about and I understand that. It’s about the health of human society and if I’m honest it’s hard to be positive about that, but it’s very difficult to find a stock that’s completely perfect.”
In contrast, an area of the consumer sector which he expects to exhibit extremely high levels of growth is E commerce.
“One of my beliefs from my experiences is that stock markets quite often undervalue high growth situations – it struggles to cope with them due to potential risks involving young companies,” he said. “But by holding back, I think that this can provide a great other investors with an opportunity because if the growth situation is sustainable, then it’s my firm belief that the stock market undervalues these situations and they can do superbly well.”
“Rightmove is an example, we don’t have it in the fund but we’ve looked at it. We have JustEat in the fund as one of our core internet consumer plays, and it has adopted a process whereby the consumer is winning, the retailer of the restaurant is winning and the company that brings it all together is absolutely making out like a bandit.”
While these stocks are currently trading at high valuations, Kennett says that they are likely to continue growing and therefore increase in value, and he says that investors are likely to regret not buying into a seemingly expensive stock that still offers plenty of sustainable growth.
“Some of the best all-weather stocks out there are in the consumer sector. You get the transparency - we can all go into a Costa or we can all go into a Marks and Spencer and we can see what we’re investing in and therefore understand the product,” he explains.
“One of Warren Buffet’s principles is all about investing in what you can understand, and I’m a big believer in that, and I think the consumer sectors offer this.”
Since its launch in October 2013, CF Canlife UK Equity has returned 6.34 per cent, outperforming its FTSE All Share benchmark by 6.54 percentage points and beating its peer average by 149 basis points.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund has a clean ongoing charges figure of 0.8 per cent.
