News - Economics / markets
Categories: Economics / Markets
A number of top fund managers took a hit on their portfolios this week as retail favourite Tesco issued a profits warning, sending its shares down 16% in a day - the largest fall since 1988.
The supermarket giant, which has a market cap of £26bn, suffered its worst Christmas sales for decades, with 2.3% shaved off like-for-like numbers in the six weeks to 7 January.
Chief executive Philip Clark was forced to issue the first profits warning in 20 years as he said revenues for the year are likely to be at the lower end of forecasts.
Shares plummeted 16% to 323p on Thursday, and remained around the 318p mark on Friday morning, disconcerting managers who backed the stock in the belief food retailers would be a defensive play in the volatile markets.
Invesco Perpetual's Neil Woodford, PSigma's Bill Mott, F&C's Phil Doel, Newton's Tineke Frikkee, and veteran investor Warren Buffett have all held the retailer in their portfolios in the last six months.
Mott said he was very overweight food retailers in his £452m Income fund this time last year with 7.1% in the sector and large holdings in Tesco, Morrison, Sainsbury's, and Booker.
"However, during 2011 we pared back our positions as it became clear the supermarkets were not as defensive as we had first hoped, and the major groups continued to spend an alarming amount of cash despite dubious returns. So we entered 2012 with 3.7% in the sector."
He is still overweight Tesco with a 2.2% position versus the index weighting of 1.5%. He admitted the share price drop was painful, but punitive, as the recent ‘Price Drop' campaign, a promotion launched to reverse declining market share, failed to stimulated sales.
However, Mott remains optimistic: "The investor conference call suggested that the group is thinking more about investments to improve the customer experience in the UK with more check-outs, better display, and faster restocking. This will not necessarily be disastrous for sector profitability.
"Tesco is also talking about paring back its expansion programmes in the UK, a move investors will welcome."
F&C's Phil Doel had a 3.9% stake in Tesco within his F&C UK Equity Income fund at the end of November, but said he had sold down the position substantially since then so it is no longer among his top 15 holdings.
Although he was not surprised by the warning on the future profits, he is concerned.
"The slowdown was not a surprise, having been well flagged up, but the margin reset - which is a 2012-13 issue - has pushed the shares down," he said.
"It will also take time for Tesco to work on its competitive positioning, and we need to see some clarity on what it is doing, and see evidence of what impact this has on the business."
Paul Mumford, who has 1.9% in Tesco in the £36m Cavendish UK Select fund, said he would top up his holding if the share price fell back to 300p.
"The company that could do no wrong is now experiencing a bit of a hiccup. Investors were prepared for disappointing trading results over Christmas, but they were not prepared for more difficulties moving forward.
Brokers and analysts have downgraded their profit forecasts more than anticipated.
"When people get accustomed to the broker forecast, it could be a decent entry point. Also the dividend yield is 4% and, compared to what you get at the bank, that is not to be sniffed at."
Woodford's £10.7bn High Income and £8.6bn Income funds are the third and fourth largest investor in Tesco, according to Thomson Reuters data up to March 2011.
At the end of June, Invesco Perpetual figures show he held 3.44% of the High Income fund in Tesco. The group declined to comment.
Meanwhile renowned investor Buffett upped his stake in the retailer by £120m in September, taking his total holding to 3.64%.
Newton's Frikkee holds 4.03% in the £2.3bn Newton Higher Income fund while colleague Iain Stewart has 1.5% in the £2.6bn Balanced fund.
The £187m Templeton Growth fund, run by Dylan Ball, Heather Arnold and Peter Moeschter, is the ninth largest investor in Tesco, as at 30 September. The supermarket is 1.19% of the fund.
On the fixed income side, Fidelity's Ian Spreadbury has previously also been a buyer of the retailer.
One man buying on weakness yesterday was Tesco chairman Sir Richard Broadbent, who added to his holding with the purchase of 30,149 shares priced at 329.98p a share.
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