Bricks and mortar retailers are having a bad time of it on both sides of the Atlantic, as e-commerce continues to disrupt the traditional market. In the US, department stores and malls have seen footfall decline, losing custom to the likes of Amazon (AMZN) and eBay (EBAY).
In the UK, there are homegrown disruptors. As well as the looming presence of the US giants, domestic offerings such as ASOS (ASC) and Boohoo (BOO) continue to see rapid sales growth. Meanwhile, ‘value’ offerings – particularly through Aldi and Lidl in the supermarket space – are a further threat.
So, too, is dwindling UK consumer sentiment. With Brexit uncertainty impacting the economy, many are putting off big-ticket purchases. Evidence of this? The Christmas trading period was the worst we’ve seen in a decade, according to figures from the British Retail Consortium released last week.
Total retail sales showed 0% year-on-year growth in December, it said, while a consumer spending report from Barclaycard showed growth of just 1.8% year-on-year in December – the lowest rate since March 2016.
Almost half of the companies listed on the London Stock Exchange in retail sub-sectors have seen their share prices fall by more than 30% in the year to 14 January. Some are at the top of the list of the most-shorted UK stocks.
Below, we searched Morningstar Direct to find which funds postively rated by Morningstar analysts had the largest exposure to companies in retail-related sectors.
Majedie UK Equity
The Bronze Rated £3.4 billion Majedie UK Equity fund has 14% of its portfolio invested in retailers, with the GICS Food & Staples sector taking the majority of that, at almost 10%. It also has 2.5% held in specialty retailers and less than 2% in multiline, or department, stores.
Majedie Asset Management runs a multi-manager approach to its funds, with this offering split between four different managers running sub-portfolios. They all search for shares with the highest potential upside.
The main holdings here would be in supermarkets, with Tesco (TSCO) and Morrisons (MRW) in the top 10 and Sainsbury just outside.
Marks & Spencer (MKS) has been a drag on performance, while the holding in Primark owner Associated British Foods (ABF) has exposure to the retail market but is by no means a pure play.
The fund has more than 150 positions, with small stakes in the likes of Dixon Carphone (DC.), which has struggled owing to the peaking smartphone market; DFS Furniture (DFS), a seller of big-ticket items; and the struggling Mothercare (MTC), a holding that has been added to recently though is less than a 1% position.
Investec UK Special Situations
Run by Alasdair Mundy, this value-focused strategy has around 13.5% exposure to UK retailers, with department stores and supermarkets making up the bulk at over 11% combined.
The Silver Rated £750 million Investec UK Special Situations fund has produced some unexciting returns, but retains many positive attributes, says analyst Simon Dorricott.
Its deep value angle leads Mundy to out-of-favour parts of the market, with retail being one high-profile example of this. It’s another with big positions in Tesco and Marks & Spencer, with Next (NXT) not far behind.
Kingfisher (KGF) has had troubles both in its Homebase franchise here, but its biggest headache in recent years has been its Castorama business in France. Shares have halved since peaking in 2014 and are down a third in the past year.
Topps Tiles (TPT) and Carpetright (CPR) are much lower weightings in the fund, but have had their own troubles of late.
Schroder Income and Schroder Recovery
Two funds from the same stable and management team, Bronze and Silver Rated Schroder Income and Schroder Recovery have weights either side of 11% in retail.
That exposure is pretty much confined to supermarkets and multiline outlets, with Recovery having a tiny amount in specialty retail.
Like the Investec fund, both are value funds. They look to find firms trading at significant discounts to their perceived fair values. The team also runs global mandates along the same lines.
Morrisons is one of the largest holdings in both funds.
BlackRock UK
The only fund in our list with exposure to internet retailers, though a small 0.35% weighting, the £450 million Bronze Rated BlackRock UK fund, run by Nick Little, is more growth-oriented.
An all-cap mandate, the fund tends to be more biased towards mid and small caps relative to its FTSE All-Share index, says analyst Peter Brunt.
Tesco is the largest position, at just over 5%, with Next at almost 3%. After that, discount grocer and general merchandise store B&M (BME) has largely been a success story, despite coming off almost a third since its November high.
Jupiter UK Special Situations
The near-£2 billion Silver Rated Jupiter UK Special Situations fund has just shy of 10% in retail companies.
Manager Ben Whitmore is another with a “genuinely contrarian and value-oriented investment philosophy”, according to Brunt. He’s “an astute investor”, the analyst adds.
Its retail exposure is more balanced across sub-sectors, though has zero exposure to e-commerce names. Again, the likes of Tesco, M&S and Kingfisher crop up as meaningful positions, with US luxury fashion producer and seller Ralph Lauren (RL) also up there.
Bicycle retailer Halfords (HFD) takes up around 1%. It’s another poor performer, de-rating more than half since its mid-2015 peak of 548p. Shares are down 40% since May. Mothercare is one of its ‘tail’ of smaller investments.
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