Fund Manager Laura Foll on ESG, M&S and Shein

VIDEO: Janus Henderson's Laura Foll talks to Christopher Johnson about holding fossil fuel stocks, fast fashion fads and Marks & Spencer

Christopher Johnson 13 June, 2024 | 11:20AM
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Christopher Johnson: You hold fossil fuels across the portfolio, so in the fund I mentioned and the investment trusts. And climate change is, I would say, the greatest challenge of our time. How do you justify investing in oil and gas companies with everything going on?

Laura Foll: Really good question. What you've always got to bear in mind is we're running these funds through the UK benchmark and the FTSE All-Share has about 11% in fossil fuels. So, we, in all of the funds that I manage across the four funds, are underweight fossil fuels. So, we have less in the benchmark. And so, the question is why do we have them at all? So, we do hold less than the benchmark, but why are they there? It's a case of portfolio balance. We hold – and this is quite nuanced, bear with me – we hold quite a lot in the industrial sector, again across all the different funds. We are overweight that industrial sector. And these are companies that use a lot of fossil fuels and need to use a lot of fossil fuels. They're trying to move away from it, but in some cases they can't. So, think huge furnaces that need to heat up to 1,000 degrees plus, and you can't do that at the moment without using gas. And we have a lot of these companies in the portfolio.

The oil and gas weighting is almost a hedge for those industrial companies. So, what I mean by that is you get to a Ukraine year where suddenly the fossil fuel price, oil, gas spikes beyond what anyone thought would have happened. Those industrial companies had a really tough time because they are using a lot of those fossil fuels. Their input costs suddenly jump up unexpectedly. You have to have something else elsewhere in the portfolio that can shoulder some of that and do better in those types of times. And in 2022, it was those fossil fuel companies that acted as a balance for the portfolio and helped shoulder some of that burden.

So, the way I think of it is it is underweight, but we need to have a small position in this area for those years like the Ukraine year that no one saw coming. If it had been six months before Ukraine, no one would have forecasted gas doing what it did or oil doing what it did. But in a way, it was good that we did have those fossil fuel companies. Because as much as we need to move away from them in these very high temperature applications and in lots of other applications as well, we're not there yet. Those companies, those industrial manufacturers aren't there.

CJ: I also wanted to get your perspective on GSK. It's another top holding that is across the portfolios that you run. Are you concerned about the impact of the litigation against GSK over its heartburn drug Zantac?

LF: Definitely the biggest overhang on the shares at the moment. And the way I think of it is there's litigation – there is no way that I can see and go, well, the litigation cost is going to be 2.3 billion and this is what's priced in. It always has to be very sort of fingernail. But if you look at the way the shares are trading, they're already pricing in what looks like a very substantial liability. And there will probably be a liability. And as a shareholder, and particularly a shareholder that has a long time horizon – so, I'm thinking of these shares five years would be roughly my time horizon – I can think as a shareholder, yes, there probably will be a liability. It could be a few billion, I don't know. But the GSK balance sheet could shoulder that. The shares already looked like they're pricing in a few billion at least. And moving away from litigation, they seem to be making real progress on their pipeline. The longer-term question mark around GSK has been they haven't had as much success as someone like AstraZeneca in terms of moving on their pipeline. Astra has had huge success with some of its oncology products, and GSK has lagged in that. But they are now making progress with things like an RSV vaccine, their shingles vaccine is selling very well. So, they do seem to be making progress. And I think people have almost forgotten that because they're so focused about the Zantac liability.

CJ: I'm also interested in M&S. So, its share price is currently rallying. So, what is driving its success at the moment? What's going on there? What's the story?

LF: It's really a story of management change. And it began with Archie Norman, who is the chairman. He came in a couple of years ago. He brought with him a new management team. And M&S has been one of these companies that's had potential for such a long time. It's had so many almost turnarounds and then it hasn't quite worked. And it's kept a surprisingly high market share in clothing for all this time. The food business has been running well for quite a long time. It's kept its sort of slightly luxury positioning in food. Lots of people go there for a bit of a treat and might crave a microwave meal or whatever it is. But the clothing business is the one that's been much more volatile in terms of its delivery. And Archie Norman comes in and makes some changes that I think to you and me or to most people would seem completely logical. The things like they had 30 different pair – roughly 30 different pairs of black men's formal trousers. So, you'd go in as a customer and you'd just be completely bewildered by which one am I supposed to buy? And he went in, and he reduced the SKUs, the number of items bought a long way. So, they ordered deeper, and a smaller number of items makes it clearer for the consumer. You get the economies of scale in terms of buying, which means that you can reset the pricing. So, anyone that's gone into the store – I find this when I'm buying my kids' clothes, I get my kids' clothes, it's much more competitively priced than it was, say 5, 10 years ago, you know, much, much – to a noticeable degree. And they've started regaining market share because it's a better bought item, it's more competitively priced. So, they're regaining market share on clothing and they're also regaining market share on food. They've done a similar thing in food where they've reset the pricing. But none of it feels rocket science. It's just about returning to being a well-run retailer and you're seeing that come through in the numbers and in the valuation as well.

CJ: I also wanted to ask you about Shein, possibly IPO-ing on London Stock Exchange. What is your view on that? Do you think it's a positive? Do you think it actually will go through? There's a lot of controversy around the supply chain of Shein. What's your view on this story unfolding?

LF: So, we'll look at it as an investment case. I think my view as someone who hasn't looked at it in a great deal of detail is that the life cycle of these online retailers is very short. So, if we look at things that – we don't own ASOS and we don't own Boohoo, but they went through brief periods of doing phenomenally well and of getting the attention of that younger demographic, but it didn't last very long. They went through a very high valuation at that point where they were growing very fast, but honestly it lasted – that good period lasted a couple of years and the shares have come off a long way from their highs in both those companies. So, I think valuing these very fast-growth, newer, online-only companies is very challenging to know what valuation you put on that because the longevity of them does not look particularly compelling.

CJ: Why do you think that is? Is it because maybe consumers, they like the Boohoo's originally and then they may move back to the Zara's and the H&M's of the world they maybe have a bit more of affinity to? What's going on there, you think?

LF: It's incredibly competitive. If you think about that younger demographic, it has to be a very, very competitive price point. I mean, you do see that with Shein, the prices are very, very low. And the challenge that I found with those brands is you need to keep getting the younger audience. You don't want your brand to age with your customers. That is to a degree what happened with things like ASOS where – I was one of the original young ASOS customers back in the day and it did slightly age with us, but you've got to keep winning the next generation that's now on TikTok or whatever. And that can be quite a challenge to keep doing that over and over. And that demographic does get older, so you've got to keep getting the young people. It can be a challenge over a long period of time.

CJ: My final, final question to you is about Rolls-Royce. I mean, it's one of the stocks that has really pushed up the FTSE 100. I wanted to get your view on what's going on. Why is Rolls-Royce doing so well?

LF: So, Rolls and M&S are actually similar in a way. Obviously, they're not similar companies. They're completely different. But they're similar in terms of their turnaround in that I think they're both driven by management change and both of them have had that potential for a long time. So, Rolls has had a big market share in its wide body jets for a very long time. But the problem that it's had is historically it didn't make much cash. So, people were always saying, well, your earnings are this, but it's not coming through into cash. And part of that is that they weren't appropriately charging. They weren't particularly good at saying to a customer, well, you know, the contractor says this, so can you give me this please? They were slightly relaxed on that. So, they've got better at pushing up pricing.

And let's be honest, there's also an end market tailwind that we're back flying post COVID. So, with these turnaround stories, it always helps if you've not got the wind in your face. If people are out there and they're flying again, the flying hours go up. Rolls charge by flying hour. So that's helpful as well. So, you've got the self-help element and then you've got the end market element as well. And it's one of these companies in the UK where it is genuinely unique in what it's doing. It's one of the global market leaders in engines. And unfortunately, we don't have that many companies in the UK where we can firmly say, this is a global market leader. It's got 50% market share globally in what it's doing. So, I think once people see that the turnaround is happening and real, that that's quite powerful because it's got global end markets that it's serving.

CJ: This is Christopher Johnson for Morningstar UK.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
GSK PLC1,517.00 GBX0.80Rating
Janus Henderson UK Eq Inc&Gr A Acc845.24 GBP0.70Rating
Marks & Spencer Group PLC309.60 GBX2.01Rating

About Author

Christopher Johnson  is data journalist at Morningstar

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