The funds shopping for bargains on our high streets

Shoppers will know that this year has been another terrible one for our high streets with the likes of Toys R Us and Maplin going out of business, and a rescue deal for House of Fraser.

Fund managers would be mad to invest in any stocks linked to our spending habits, right? Maybe not. While those businesses teetering on the brink are unlikely to be wise investments today, there’s plenty of others to be found at the right prices that could represent great long-term holdings.

A supermarket sweep

UK fund managers have long had a love affair with Britain’s supermarkets, which sit at the top of the retail tree in terms of store sizes and convenience shopping. For example, Threadneedle UK Equity Alpha Income and JOHCM UK Dynamic both of which are on the Chelsea Core Selection, hold Morrisons (Wm Morrison Supermarkets plc) as top-10 holdings. The retailer is seen as a ‘recovery’ stock, which has cut costs and prices and seen its share price rise in 2018.

Other funds, Investec UK Special Situations and Jupiter UK Special Situations (on the Chelsea Selection), are holders of Tesco plc. While this supermarket has had its fair share of problems in recent years, the contrarian managers of these funds, Alastair Mundy and Ben Whitmore respectively, are convinced by its long-term prospects, and it is another stock that has so far had a good 2018.

Who’s Next?

Another retailer that fits with Alastair’s description of “fallen angels” is Next plc. This is held by several UK fund managers; also as a top-10 position in Edentree Amity UK, for example. A bellwether for high-street clothing sales trends, the company recently reported sales growth for the second-quarter of the year as hot weather lifted demand for its summer ranges.

It's directory business is a large proportion of sales and has evolved from a catalogue business to an online business. It now also sells other companies' clothes,” he explained. “When people buy online they buy extra items and return most of them. This can be expensive for companies, but Next has nailed its cost base in this respect. It knows to a penny how much activities cost the company.

The stores are also carefully managed - while the likes of House of Fraser and Debenhams have 25 year leases they are tied into, those of Next are much shorter so they can exit an area if they need too.”

However, good news is not always reflected in stock prices in the fickle world of fashion retail, which is why some fund managers prefer to take a different route to profiting from the consumer demand story.

Goods giants

Consumer goods, or ‘staples’, companies are often seen as an ideal way to access our spending habits in some of the UK’s biggest brands. One of the largest listed in the UK is Unilever, home to numerous household names such as Marmite, Persil and PG Tips. While the company’s decision to move its headquarters to the Netherlands has raised fears it could be ejected from the FTSE 100 index of the largest UK stocks, this has not stopped fund managers from backing it.

For example, TB Evenlode Income, also on the Chelsea Core Selection, counts Unilever as one of its largest holdings, second to another consumer stock Diageo, which owns drinks brands Guinness, Captain Morgan and Baileys. Manager Hugh Yarrow continues to hold these stocks, despite some others believing they are expensively priced, or ‘overvalued’.

Cherry picking

Investors must be careful not to put all their faith in one idea, or sector, especially knowing that any stocks or funds linked solely to consumer spending are likely to be volatile. However, those fund managers that are able to tread carefully and cherry pick the best ideas to be held for the long term, have proven there’s bargains still to be had!

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James's views are his own and do not constitute financial advice.

Published on 28/08/2018