Alastair Mundy’s Investec UK Special Situations and Richard Colwell’s Threadneedle UK Equity Income funds are among the high profile UK equity portfolios benefiting from the strong recovery in UK supermarket stocks in 2016, according to research by FE Trustnet.
The past few years have been a tough period for investors in the major UK food retailers. Tesco, Sainsbury’s and Morrisons have all seen substantial pressure on their share prices, as the graph below shows.
Performance of stocks and index over 3yrs
Source: FE Analytics
Supermarkets have seen their businesses suffer as the food retail market becomes increasingly polarised between the rise of the discounters likes of Lidl and Aldi, who have been expanding their business by double digits for the past five years, and the growing market share taken at the higher end of the market, mostly from Waitrose and Ocado, as well as the transition to online shopping and delivery.
While Tesco, Sainsbury’s and Morrisons are still down by a significant amount from their former highs, they have staged strong recoveries this year, particularly in the case of Morrisons and Tesco. Morrisons is the fourth best performing stock in the FTSE 250 and Tesco is fourth best in the FTSE 100.
Performance of stocks and index in 2016
Source: FE Analytics
Alastair Mundy, who uses a deep value strategy in his £1bn Investec UK Special Situations fund, has 3.5 per cent in Tesco and 2.8 per cent in Morrisons.
He says while they were under continued pressure in 2015 as the discounters continued to win market share, both Tesco and Morrisons are starting to benefit from management changes last year.
“Most independent forecasts assume that Aldi and Lidl will increase their market share from around 10 per cent to 15 per cent over the next five years,” he said.
“This is a meaningful amount of market share for other participants to relinquish, particularly for an industry in which volumes are quite stable and price increases are very reliant on food price inflation. However, not all of the constituents of the other 85 per cent of market share are necessarily losers.”
“We believe that Tesco, with its huge market position and relatively new management, can be run more efficiently, focus on areas that the discounters do not and cannot, and win back lost customers to drive profitability.”
“Meanwhile, Morrison, under new management as well, is reversing its confused strategy of recent years and has brought a more entrepreneurial approach to the business. Its significant freehold property backing, thus avoiding rent, also offers a significant competitive advantage.”
Mundy has backed the two supermarkets for some time. He bought Tesco about two years ago and sold out as further downside spelled losses. However, he bought back in just over a year ago.
The £965m Majedie Tortoise and £170m Old Mutual Equity 2 funds also hold both Tesco and Morrisons in their top 10 largest holdings. Four Schroders funds also hold both: are Schroder Income, Schroder Income Maximiser, Schroder Specialist Value UK Equity and Schroder ISF European Dividend Maximiser.
Source: FE Analytics
In total 25 funds own Tesco and 20 own Morrisons in their top 10s.Richard Colwell, who has headed the £3bn Threadneedle UK Equity Income fund since 2010, has Morrisons in his top 10 despite the grocer’s cut to its dividend.
Morrisons has paid out just 5p per share in its last full year, compared to 13.65p for the previous year. However, its rebound means it will enter the FTSE 100 at the next rebalance and it recently announced a tie-up with Amazon for the internet firm’s fledgling online food business.
Colwell started buying the stock back in summer of 2014 and today it is his fifth largest position at 3.2 per cent.
Helal Miah, investment research analyst at the Share Centre, says Morrisons’ fortunes look better now it has re-joined the FTSE 100 following its demotion just three months ago. However, he adds it is still early days for the stock despite a recent tie-up with Amazon.
“The company’s latest interim trading statement, in January, showed that it had a surprisingly good Christmas trading period and signalled that shoppers are returning to the supermarket. However, investors should bear in mind that Morrisons is still in the early stages of a recovery strategy led by its relatively new chief executive officer David Potts, and there remains much more to do. For that reason we prefer Sainsbury’s for investors interested in the sector,” he said.
John Ibbotson, from retail consultants Retail Vision, also argues the food retailer still faces an uphill struggle.
"Morrisons may be back in the FTSE 100 and it may have teamed up with Amazon, but many will argue its core business is still mutton dressed as lamb," he said.
“While Morrisons' numbers have started to improve, and Potts is doing a good job, it’s hard to believe we are entering a new era for the struggling grocer. Morrisons had a half decent Christmas in relative terms and the Amazon tie-up has put a spring in its step but the market environment it is operating in remains as brutally competitive as ever.”
"For all the hype, Morrisons’ sales have still slumped and earnings are being inflated by asset sales, and there aren’t many assets left.”
