Following a strong start to the year, Unilever’s (ULVR) luck had reversed by the end of May; it’s been hit by sluggish demand in Europe and weakening currencies in emerging markets, from where it derives most of its revenue. Thus earlier this week the company posted its first profit warning in a decade and pushed the share price down to its lowest level in 2013.
What does this mean for investors? Are the professional investment trust managers abandoning and selling out, or do they see the weakness in the share prices as an opportunity to top up their positions?
As at 30th June, there were 26 investment trusts invested in Unilever (as measured by the most recent full-holdings portfolio data supplied to Morningstar). The most recent data do not reflect if and how any of these fund managers made changes to their positions in the stock on the back of this week’s profit warning but given the company’s size, it’s a stock on which all UK large-cap equity fund managers must have a view.
Our data show that from those 26 investment trusts, five fund managers have been top-slicing their stake in Unilever, including Alastair Mundy, fund manager of the Gold-rated Temple Bar (TMPL) and Simon Gergel of Merchants Trust (MRCH), rated Neutral. Mundy told me on Thursday of this week that in his view the recent revaluation in markets means defensive names look expensive; hence he had already scaled back his position in Unilever, among others. He still holds it for exposure to the ‘defensive quality’ part of the equity market, but he hasn’t increased it.
However, the majority of managers have used price weakness to add to their positions. That includes Job Curtis of Gold-Rated City of London (CTY), Jeremy Tigue of Silver-Rated F&C Investment Trust (FRCL) and Jeremy Whitley of Bronze-Rated Dunedin Income Growth (DIG), to name a few. Nick Train, fund manager of Gold-rated Finsbury Growth and Income (FGT), is in that camp too. At a meeting in September, Train acknowledged that Unilever’s exposure to emerging markets is of course a risk, and in particular India, given the country’s forthcoming elections in 2014, but in his view the long-term story here is intact. He believes the company has a strong franchise; given it was founded in 1930 it has witnessed a number of market cycles, and survived World War II, and it’s not about to derail.
Morningstar analyst Erin Lash shares that view, too. In her most recent report she argues that Unilever’s exposure to emerging markets, which she expects to outpace more mature markets, should help the company in the long term; Unilever continues to put resources behind product innovation, marketing and cost saving initiatives, but she also acknowledges that consumer spending will remain fragile, given the current macro environment. Still, Lash now sees the shares as moderately undervalued, trading 19% below her 2,865p valuation.
There are a multitude of factors to consider when analysing just this one stock and there’s no simple conclusion to be reached. Much depends upon the portfolio one is trying to build and the aim of that portfolio. And a multitude of views is, after all, what makes a market. Thus, personally, I would much prefer leaving this decision to the professionals and instead focus on picking the right fund manager, doing the right job, in the right portfolio.
