Monthly Archives: March 2018

Points of View: Witan Investment Trust

This week I am looking at Witan Investment Trust, a UK-listed fund that invests in global equities through a multi-manager approach. The manager and CEO, Andrew Bell, has been leading the Trust since 2010 and has been responsible for a significant refinement of the strategy, moving the fund towards managers that have higher conviction portfolios and a greater focus on company fundamentals.

Over the last 18 months the fund has made several changes to the line-up of external managers to reflect the new strategy. Previously, the fund has used index-trackers to gain exposure to Europe and Emerging Markets as the investment team felt that they needed more time to identify suitable active managers. The fund now only consists of active managers and has seen the total number of managers used fall to 10, as Andrew felt they did not need five global portfolio managers and moved the assets to be split evenly between the three in which they had the highest conviction.

Mr Bell and his team feel that with higher global debt, rising interest rates and the reduction of global quantitative easing it was extremely important to focus on portfolios where the managers have the highest conviction in their best ideas. As a result of these changes the fund is now invested in around 350 companies, down from around 550. These changes also mean that its ‘active share’, a measure of how different the underlying holdings are to the index, increased from 70% to 77%.

The multi-manager approach adopted by Witan has proved successful so far and has outperformed the peer group over the long-term. However, the fund does still hold a larger than usual number of underlying holdings. Some funds with this many holdings run the risk of becoming similar to an index-tracker but with higher ongoing costs for the investor.


Stocks in Focus: Marks & Spencer

This week I have been looking at retailer Marks & Spencer.  The high street continues to evolve and is going through a serious period of upheaval.  Disruption is being driven by the online shopping revolution, led by Amazon, which is changing consumers’ purchasing habits.

The internet has been a deflationary influence on pricing, which has been beneficial to the “squeezed” consumer.  However, with the headwinds from an increase in business rates and the National Living Wage together with inflationary pressures of increased input costs driven by both currency and the cost of raw materials, profit margins of traditional bricks and mortar stores continue to shrink.

Marks and Spencer reported its 3rd quarter earnings in early January, which included its Christmas trading statement.  Sales at the company’s Simply Food business underperformed, previously viewed as one of the strongest growing divisions.  This was particularly disappointing versus its food peers who reported strong Christmas figures.

At the end of January the company announced the closure of 14 stores nationally, which meets with its 2016 programme of repositioning around 25% of the company’s Clothing & Home space.  This forms part of the company’s cost saving strategy which also includes the reduction in the pace of openings for its Simply Food stores.

Not only does the company need to continue with constructively cutting costs, but it also needs to demonstrate how it is innovating within Clothing & Home and Simply Food in order for the company to remain relevant in an increasingly competitive marketplace.  Marks & Spencer has a reputation for delivering good quality products, however ensuring that these products reach consumers in as efficient manner as possible will define how the company succeeds in the future.

Marks & Spencer will update the market with full year results at the end of March.

Stocks in Focus: Rolls-Royce

This week I am looking at the British engineering giant Rolls-Royce, following its annual results last week. I last wrote about Rolls-Royce in January, after it made the announcement that it would restructure its five divisions into three core operating units – a decision that was welcomed by investors. The annual results have come as further good news, with the cost-cutting drive that included the restructure helping the company to return to profit, following its largest ever pre-tax loss in 2016.

The results came in ahead of prior expectations, with the company making £4.9bn in pre-tax profits in 2017.  £2.6bn of this came from non-cash gains on its foreign exchange hedging strategy, thanks to a strengthening sterling. The operating performance was also positive, with underlying revenues increasing by 6% to £15.1bn.

Despite the encouraging results, the year has not been without difficulties for the company. Technical problems were found with its Trent 1000 jet engines, used to power Boeing’s 787 Dreamliner, and some of its Trent 900 engines, resulting in them wearing out more quickly than expected. The issues cost the company £170m in 2017, with management forecasting an increase in cost to a peak of £340m in the coming year. However, CEO Warren East has reassured investors that the problems will be fully resolved by 2021-22.

Although the engine fault issues will continue to be costly for the company over the next 5 years, Mr East continues to look for opportunities to cut costs in other areas. Two years after making initial cuts to management, a further restructure is under way that should result in significant cost savings. Mr East has also reassured investors that the ambitious promise of £1bn free cash flow by 2020 is still possible, which will be impressive if achieved.

Stocks in Focus: Reckitt Benckiser

This week I’m looking at Reckitt Benckiser, the consumer goods company known for its health, hygiene and home products, following its full year results last week.  The results were disappointing after a turbulent 2017 with the company reporting flat net revenue growth and a decline in profit margins.

The results did not come as a surprise to investors as the company suffered a series of “one-off” problems during the first 3 quarters of 2017. Reckitt was one of several multinational companies to be affected by the global cyber attack in June last year, which disrupted its ability to manufacture and distribute products to customers in multiple markets.  The company has also struggled with the failed product launch of a new Scholl pedicure product, ongoing fallout from a South Korean safety scandal, and volatility in India due to the implementation of goods and services tax.

Despite the poor performance, Chief Executive Rakesh Kapoor is determined that the business can recover, and this was shown in Q4, reporting 2% net revenue growth. The recent acquisition of Mead Johnson, the global baby formula company, has contributed to Reckitt becoming a major player in the consumer healthcare segment, and as a result Kapoor has made the decision split the company into two units – one focused on healthcare and the other on home and hygiene products.  However, the new organisation structure is likely to be costly and the company has declined to give a margin target for 2018, admitting that it will be affected by the reorganisation.

Kapoor remains confident that the company can make a comeback after a difficult year, and strong performance of previous years stands him in good stead. However, only time will tell if the reorganisation within the company has come at the right time and if management are more prepared for any future issues that may occur.