How to profit from a sector most fund managers are avoiding

While many fund managers don’t invest here, others believe there are plenty of 'value' opportunities. 

It takes plenty of patience and nerves of steel to go against the crowd and conventional wisdom, with UK retailers a case in point. The disruptive power of technological change has structurally challenged the retail sector, and the message for businesses is simple – adapt or die.

Unfortunately, over the past decade there have been several examples of business that fall into the latter camp, leading to heavy share price losses for investors and job losses for thousands of workers.

Research by ABC Finance, a commercial finance firm, listed the top 10 biggest high-street stores to have entered administration or filed for a Company Voluntary Agreement over the past decade; it lays bare the changing face of retail. The top 10, ranked in order of job losses, is as follows: BHS, Thomas Cook, Comet, Poundworld, Blockbuster, Debenhams, JJB, Peacocks, Toys R Us, and in joint 10th place City Link and Focus.

Therefore, it is perhaps no surprise that most UK fund managers do not tend to talk up the sector. To the contrary they tend to steer clear or are “underweight”, which means in non-jargon terms they hold a smaller stake in the sector than the stock market.

Some fund managers, though, believe this out-of-favour area of the market is throwing up some compelling value opportunities.

One such investor is Fred Mahon, co-manager of the Church House UK Equity Growth. Mahon notes the popular opinion is that the high street is dead and that Amazon (NASDAQ:AMZN) is hoovering up all in its way. But he argues that if you look in the right place, even those with big high street presences can emerge as winners in the changing landscape.

He says: “JD Sports (LSE:JD.) stands out as a shining example of a retail business that has continued to grow despite a tougher environment, thanks to a combination of strong supplier relationships (hence Nike and Adidas give them the newest trainers before Sports Direct (LSE:FRAS)), being proactive in closing underperforming stores, and plenty of internal promotion of staff.

“Elsewhere, Greggs (LSE:GRG) may not strictly be a retailer, but it certainly has plenty of High Street shops and has enjoyed a record-breaking year on the back of successful innovation such as the vegan sausage roll.”

Mahon points out that there are of course great instances of online success stories. “Online, Boohoo.com (LSE:BOO) (now worth more than Marks & Spencer (LSE:MKS)) has been the perfect example of retail success, as reflected in shares more than doubling since January 2019. Its underlying brands, Nasty Gal and PrettyLittleThing, both had revenue rises of 40-50% over recent months.”

He adds:

“The demise of the UK high street has been much heralded, and whilst it will likely continue to evolve in the coming years, there still exist some brands that are continuing to attract customers in their droves alongside thriving online brands. The UK retail sector is alive and well and some interesting investment opportunities continue to present themselves.”

Another fund manager finding opportunities in the sector is Kartik Kumar, co-manager of the Artemis Alpha Trust (LSE:ATS). The portfolio’s top holding is Sports Direct, which accounts for 7.8% of assets. Other retailers in the portfolio include Domino’s Pizza (LSE:DOM) and Tesco (LSE:TSCO).

“When I look at companies I grade companies on three things; the attractiveness of the core business, whether I am buying at an attractive price and thirdly whether the management team is adding value. When putting all these factors together, and with the fact that for some retailers analyst coverage is notably lacking, there are opportunities. I am of the view that the disruptive force of technological change will result in strong getting stronger and the weak becoming weaker.”

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