This summer, we spoke to a well-known value fund manager, who – to paraphrase – said he wouldn’t touch office space commercial property with a barge pole. This is a professional investor whose job it is to find assets significantly undervalued by the market, and extract returns for their investors, saying that office space was just too cheap to warrant even their interest.
The reason? We just don’t know when – or even if – the UK will be returning to working in the office in the same way we were just months ago. There seems to be mounting evidence to back up this argument.
This article isn’t personal advice. If you’re not sure if an investment is right for you, please seek advice. All investments and their income can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.
Working from the home office
Asset manager, and FTSE 100 company, Schroders announced in August that it would be permanently changing its employment contracts to allow all its employees to work from home as much as they like. Previously, the firm had capped home working as standard to one day a week. Now, you never need set foot in the office.
Added to this, watchdog group Transport Focus surveyed 2,000 former commuters and found nearly half of those asked think their job will be more home-based in future.
At the time of writing, looking at this year’s FTSE 100 biggest movers, the market is pricing in this uncertainty – commercial property stocks are among the biggest losers. British Land and Land Securities are both down more than 40%, as uncertainty swirls not just around the future of office property investments, but retail assets too.
Retailers globally have been hit hard in the past six months. When recession looms it’s human nature to cut your discretionary spending. But this downturn has had the added headwind of eliminating footfall. Trawling the mall was a no-no in the depths of lockdown, when the government banned all non-essential shops from opening.
Walking down the online aisle
Instead of pacing the aisles, consumers have been turning online. According to retail sales figures published by the House of Commons, the average weekly value of internet sales was £2.3 billion in June 2020. That’s a rise of 73.4% on the previous year.
Internet sales as a percentage of total retail sales
Source: ONS to July 2020
The FTSE’s best performing stocks of the year back up this trend. Among the biggest risers is food-delivery firm Ocado. Even in the luxury space online is booming – e-retailer Farfetch reported sales up nearly 50% in the three months to the end of June this year. Its bricks-and-mortar peers, Selfridges and Harrods, announced large redundancies.
Blanket sell offs create opportunity
The disruptive trends of more home-working and e-commerce are nothing new, but the unprecedented events of 2020 have accelerated demographic and societal trends.
Disruptors have been leading the stock market charge for some time – just look at the value versus growth trade in the US. Tech stocks now dominate much of the global stock market, so much so that some have arguably become overvalued.
That’s not to say tech is the only game in town.
Looking across equity sectors, in all the uncertainty, a lot of wheat has been sold off with the chaff.
Speaking to UK equity income fund managers, they’re often surprised that so many companies with strong balance sheets, and positive outlooks, are still so beaten up. As with any market fall, this could provide an excellent opportunity to top up on those positions. This opportunity doesn’t come without risk.
Uncertainty still looms and we could continue to see high volatility.
Depending on your risk appetite, and the shape of the rest of your portfolio, there’s a wide range of UK equity income funds to choose from. Opportunity could lie in those hunting for good value gems in this year’s market turmoil.
Looking for ideas?
Investing in these funds isn’t right for everyone. You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made.
Make sure you understand the specific risks of a fund, and that any new investment forms part of a diversified portfolio.
We’ve given some investment ideas for your interest, but they aren’t a guide to how you should invest. Ask us for advice if you’re not sure an investment is right for you.
Troy Trojan Income
This fund focuses on sheltering on the downside. The aim of the fund is to deliver income, but not at the expense of capital – however charges can be taken from capital which can increase the yield but reduces the potential for capital growth.
The fund is relatively concentrated which can add risk. It could fit a portfolio invested for income with a more cautious outlook, or alongside higher-risk income funds from across asset classes and geographies.
The managers have sold out of commercial property, energy and banking stocks this year, which they consider challenged in the new world and invested instead in profitable companies with growing cash flow. This fund owns shares in Hargreaves Lansdown plc.
The manager invests using a value strategy. It’s been very beaten up in recent years as growth stocks have led the charge. We think the fund would work well alongside other UK equity income funds with a different style bias to add diversification. It’s not for the faint hearted, as the value style could continue to underperform for some time.
Manager Ben Whitmore has recently added stocks to the portfolio mindful of the coronavirus-related societal shifts. The fund invests in a smaller number of companies, which means each holding can have a big impact on performance, increasing risk. Charges can be taken from capital which can increase the yield but reduces the potential for capital growth.
Explore our Investment Times October 2020 edition for more articles like this.