Has the tide turned for UK equity income in 2024?
In the dim and distant 2000s, UK equity income was the hot sector. Home to a raft of star manager...
Anyone remember Supermarket Sweep? After more than a decade away, it recently returned to our screens in all its trashy TV glory.
Hosted by former X Factor contestant and Strictly It Takes Two presenter Rylan Clark-Neal, like the original series it sees teams of two contestants playing a variety of trivia games, with correct answers adding time to their clock.
The more time they bank, they more time they have to run around like maniacs and do the most expensive shop they can manage. The winning team gets to Super Sweep – which is effectively a treasure hunt around the shop for a £3,000 cash prize.
Back to the real world and food retailers have had a challenging few years.
Last August, a KPMG/Ipsos Retail Think Tank published a research note on the future of the grocery sector. Its
members agreed that five ‘influences’ were having the biggest impact on the UK grocery sector and, as such, hold the key to shaping its future: the rise of the discounters, shifting consumer shopping habits, technology, consolidation & diversification, and Brexit.
The research concluded: “The future of the sector is one where supermarkets ensure they understand their new generation of customers, following the path of the non-food sector with experiential instore experiences, true multichannel shopping and, of course, great value.”
Below we look at four UK supermarkets/food retailers that Elite Rated managers are backing.
Based in Leeds, Asda reclaimed its place as the second biggest UK supermarket chain earlier this year, with a market share of 15%*. With a history dating back almost 100 years to its beginnings under Yorkshire’s Asquith and Stockdale families, the business today services 19 million customers. Its store in Gillingham is one of the top 10 holdings in TIME:Commercial Long Income**. This fund aims to provide a secure and stable investment return primarily through acquiring commercial freehold ground rents and commercial freehold property, which benefit from long leases. The fund targets an income return of 4% per annum and capital growth. Managed by Nigel Ashfield and Roger Skeldon, supermarkets currently account for almost a quarter (24%) of the portfolio**.
The Co-op is the UK’s sixth biggest food retailer*. It is also the UK’s number one funeral service. A top 10 holding in the Baillie Gifford High Yield Bond fund**, managers Robert Baltzer and Lucy Isles commented: “Following former management missteps, the Co-op has narrowed its focus to two core businesses with leading market positions, strong brands and stable earnings given their non-discretionary nature. We believe its funeral care business is one of the fairer offerings in the market, so it should benefit from further regulation, if or when it occurs. In the UK food retail market the Co-op operates in the convenience sweet spot given the trend of consumers shopping for less, more frequently. The bonds we hold have sold-off along with all other UK corporate bonds amidst the Brexit uncertainty, but we believe this sell-off does not reflect the underlying resilience of the Co-op, particularly as a large portion of its produce is sourced locally within the UK. The bonds offer ~5% yield, so we have been topping up.”
Morrisons is the fourth largest supermarket chain in the UK* with almost 500 stores and employing 110,000 people. The company is held by numerous funds, including Elite Rated Schroder Income and Schroder Recovery funds and Liontrust Monthly Income Bond**. It is also held in JOHCM UK Dynamic fund**. Manager Alex Savvides said: “Morrisons was the fund’s top performer in September (2019), as interim results showed profit before tax ahead of analyst expectations. The supermarket group also announced a further special dividend and announced that its partnership with Amazon will be expanded. Rising sterling also helped sentiment.”
Last but by no means least is Tesco, the UK’s largest retailer* with almost 7,000 shops – the first of which opened in Burnt Oak, Barnet in 1931. The stock is a large holding** for a number of Elite Rated funds including Artemis Income, BlackRock UK Absolute Alpha and Merian UK Alpha. It is also a top 10 holding in the Investec UK Special Situations fund**, whose manager, Alastair Mundy, says: “Once arguably a market darling, Tesco, alongside other UK food retailers, came under enormous pressure due to the rise of the discounters like Aldi and Lidl. Having responded to initial fears, Tesco is now competing more successfully against the discounters and we believe is on the path to recovery – despite the recent announced change in leadership next year.”
*Source: Kantar, April 2019. Figures are for the 12 weeks ending 24 March 2019 and are based on market share.
**Source: Fund fact sheets, 31 August 2019