Three years after selling his stake in the retail giant, this fund manager has dived back in following the recent post-results sell-off. Here’s why.
The CFP SDL UK Buffettology manager hopes the investment won’t be an isolated one as he looks to get back on the front foot after a few difficult months dealing with outflows.
Next joins other FTSE 100-listed companies London Stock Exchange Group (LSE:LSEG) and RELX (LSE:REL) in a 26-strong UK-focused portfolio that also includes Games Workshop Group (LSE:GAW), AB Dynamics (LSE:ABDP) and Jet2 (LSE:JET2).
In the £723 million fund’s monthly factsheet, Ashworth-Lord told investors that retail giant Next was sold in April 2020 in response to the first lockdown and its potential impact.
He said: “We were selling other consumer-facing businesses at the time and Next was a consistency call. People who have heard me discuss this in presentations know it is a decision that I was never comfortable with.”
Ashworth-Lord said the call to restore Next to the fund was made in the aftermath of the market’s “savage reaction” to full-year results on 29 March, when boss Lord Wolfson gave a typically cautious assessment on the 2023-24 outlook.
Shares fell 4% on the day to 6,434p, even though Next also said it had far more ideas and opportunities for long-term growth than it has had for some time.
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The stock went on a powerful run from 4,300p in October 2022 to more than 7,000p in early March, having been near 3,400p in the early days of the Covid pandemic in April 2020.
Ashworth-Lord believes Next is run by one of the finest management teams the UK has to offer, adding that the investment offers sector-superior margins, a 6.2% free cash yield, returns to equity of 65% and cash conversion currently 75%.
He said: “Trends in fashion and home retail are shifting. Physical competitors continue to disappear from the high street and pure online competitors such as ASOS (LSE:ASC) and Boohoo Group (LSE:BOO) are reorienting after a tough time.
“For Next, the retail store performance is no longer a constraint on profits and its estate has some of the shortest lease commitments in the sector.”
He pointed to the success of Next’s online business as a partner for other brands, while a new warehousing facility due to open in October should add 50% to fulfilment capability along with 40% lower marginal labour cost.
The fund’s allocation to retail is currently just 1.6%, compared with 16.3% in financial services, 12.1% for support services and 11.2% in leisure goods.
In March, the fund’s share price fell by 4.7% to 288.73p as strong performances by IT business Softcat (LSE:SCT) and London Stock Exchange were offset by big declines for video games developer Team17 Group (LSE:TM17) and cyber security business NCC Group (LSE:NCC).
Ashworth-Lord added: “I hope Next will not be an isolated purchase. After several difficult months dealing with outflows from the fund (a UK-wide phenomenon, not specific to Buffettology), I feel like we are getting back on to the front foot with a handful of potential decisions to invest coming on to the horizon.”
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