Tag Archives: investment trusts

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: 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.


Points of View: Current Market

Over the past month the FTSE 100 has fallen approximately 700 points, or 8.8%.  This has come as investors comprehend an environment of rising interest rates and potentially higher global inflation, following a sustained period of loose monetary policy.

The Monetary Policy Committee of the Bank of England met on 7 February 2018 and voted to keep interest rates at 0.5, however also suggested that rates may rise more quickly than previously anticipated.  Interest rates can have an impact on nearly all asset prices.  All other things being equal, a quicker than anticipated rise in interest rates means that bond yields rise, causing bond prices to fall and that in turn causes equity prices to fall.

This is broadly what has been observed in the US market recently.  Wage growth inflation has been higher than expected.  Interest rates are one of the tools used to control inflation; therefore a higher than expected inflation figure may lead to the US Federal Reserve raising interest rates faster.  This fear of rate hikes sparked a bond sell-off, which caused US equity markets to fall.  The effect was exacerbated by an outflow from investors of low volatility strategies, causing a raft of forced selling.  The US market tends to lead the way for equity markets across the globe and the fall in US stocks was a precursor for the UK market falling back.

In the short term, rising inflation and interest rates remain a headwind for UK equities, however historically companies have been able to pass rising costs on to consumers and grow earnings faster than inflation over the long term.  Our opinion remains that equities remain the best asset class to outperform inflation over the long term.  In the short term markets may be more volatile, as evident this year so far, but for investors taking a long term view short term volatility eventually becomes insignificant.


Stocks in Focus: GKN

This week I am looking at GKN, the British automotive and aerospace components company, which last week rebuffed a takeover approach from Melrose plc – a firm that specialises in buying and turning around manufacturing companies. The informal bid from Melrose was a £7billion cash and share offer (equivalent to 405p per share at the time it was announced) along with proposals for improving GKN’s performance. The board of GKN has turned down the unsolicited offer stating that the approach was opportunistic and that it undervalued the company.

The approach from Melrose comes at a particularly difficult time for GKN. The group has issued two profit warnings since October 2017 and the incoming chief executive Kevin Cummings stepped down at the same time with the company warning about problems at its US aerospace division which he headed up. Melrose intends to formally pursue its takeover proposal and it will present GKN shareholders with an argument that the company is “an overly complex and under-managed organisation”.

In contrast, whilst the outlook is cautious and performance has been muted in the short term, GKN stated that it is trading in line with expectations. The company remains a well-diversified, high quality engineering company that is a prime supplier to the world’s biggest aerospace companies and provides parts and systems to a number of car manufacturers.

A key consideration for long term holders of a company in a prospective takeover is whether the offer price represents good long-term value and whether higher bids might be forthcoming. Melrose has until February 9 to make a firm offer and investors expect further talks and possibly a higher offer.  In the meantime, there are rumours that US buyout company Carlyle Group is also interested in GKN.


Points of View: Bitcoins

At the moment investor news is flooded by the Bitcoin phenomenon.  Bitcoins were the first decentralised digital currency, which were created in 2009 following concerns for the global banking system after the financial crisis.  The price of bitcoins took nearly 5 years to break through $1000 but has recently exploded in value and now fluctuates by $1000 in a matter of hours.

Bitcoins are essentially a string of computer code.  They cannot be printed by a central bank and are instead “mined” by computers solving a complex mathematical problem that unlocks its security.  Every 10 minutes the miner who solves the problem is rewarded with 12.5 bitcoins.  The number of bitcoins rewarded started at 50 and halves approximately every 4 years, up to around 2140 when the last bitcoin will be mined.  This means there is a limit of 21m bitcoins that can exist.  Transactions in bitcoins are only confirmed at these 10 minute mining occurrences.  The transaction history of a bitcoin is known as the blockchain and confirms the current owner of a bitcoin.

So should we consider bitcoins as an investment?  For us, an investment has to be based on certain fundamentals such as its ability to generate an income – without this one cannot calculate an intrinsic value.  On this basis we do not consider bitcoins to be an investment. Indeed, the incremental buyer of bitcoins now seems to be motivated by the fear of missing out and desire to make a quick gain, rather than concerns about the financial system and traditional currencies.  This has all the hallmarks of speculation, not investment.


Stocks in Focus: Prudential Plc

This week I am looking at Prudential, the multinational life insurance and financial services company.  Prudential has had a strong year after economic conditions turned in its favour, reporting a new business profit increase of 17 per cent for the year to September 30. The third quarter trading update also reassured investors that there are still clear structural opportunities in each of its three key markets – Asia, the US and the UK.

Much of the rise in the new business profit has come from the Asian market. This growth is expected to continue to drive the share price going forward. Management are hopeful that the Asian business will double in size every five to seven years thanks to a growing and increasingly affluent Asian middle class that has driven demand and sales.

Elsewhere, the company intends to strengthen its position in the UK asset management market, targeting the retirement income needs of an aging UK population, following its merger with M&G asset management. Prudential also own one of the largest life insurance providers in the US, Jackson National, and expect this area to perform well given the demographic shift of Baby-Boomers moving into retirement.

The Asian business now accounts for over a third of group profits but faces strong competition, with companies such as AIA having a much greater presence in China. Other concerns include how a weakening of the US Macro backdrop could impact the US business, and whether an excessive rise in UK interest rates could threaten the UK annuity business. While the company appears to be well-poised for further growth, these threats are significant.


Stocks in Focus: Fidelity Special Values

This week I am looking at Fidelity Special Values (FSV), an investment trust that has recently released results for the year to 31 August 2017 and is celebrating five years under the management of Alex Wright.

Mr Wright adopts a contrarian and value style to picking stocks. This means that he focusses on finding out of favour companies that he feels are being priced substantially below their true value. This undervaluation usually stems from the market over-reacting to negative news concerning a stock or sector.

The trust sits within the UK All Companies sector and is able to operate in a completely unconstrained manner versus its FTSE All-Share benchmark. This has allowed Mr Wright to have a higher level of exposure to medium and small sized companies relative to his peers. This area is where Mr Wright and his colleagues are currently finding the most value. They are also looking at companies that earn the majority of their earnings in Sterling, as the team feel those with substantial overseas earnings are currently looking more expensive.

With the current uncertainty surrounding markets, the ability to pick stocks successfully on a bottom-up basis becomes evermore important. Mr Wright’s contrarian and value-based approach can sometimes result in a share price that underperforms the wider market in the short-term. However, his track record since taking over the management of FSV in late 2012 is impressive and suggests that his approach is adding value over the long term.