Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Jeremy Lang, Manager of the Ardevora U.K. Equity Income Fund. Hello Jeremy.
Jeremy Lang: Hello there.
Wall: So, what's your first stock today?
Lang: Quite like Next (NXT). We've owned it for quite a bit. We like it because it's an unusually conservatively run business, particularly as a retailer, partly because it had a sort of near-death experience some time ago and the guy that was running it then – although he is not still running it now, his son is. And so we take the view that he is being kind of scarred by that experience and so consequently he is unusually conservative in the way he sets up and runs that business which is unusual for retailers. So, unusually conservatively run, very shareholder-friendly but often gets wrapped up with the whole worries about what's going on with retailing generally whereas it doesn't really behave like an ordinary retailer. So, like that one.
Wall: I was going to say about Next, you've mentioned it there, but the high street continues to take a battering. I mean, it's been a little while, but it seems every six months somebody goes under. Why is Next immune to that?
Lang: Mainly because it's boring. It doesn't take big fashion risks. It doesn't take big financial risks. It's not kind of obsessed with growing superfast, knows its market, doesn't try and do anything fancy and we kind of like that. So, that makes it pretty impervious to the vicissitudes of the high street.
Wall: And what's your second stock?
Lang: Second stock is TSB (TSB), which is a new bank which came out of Lloyds (LLOY). We find that – we like and we kind of find it interesting because it's the first bank I've bought since before the financial crisis. I probably like most sort of more experienced fund managers had a pretty poor experience of banks and often what happens when you have a poor experience in certain areas that you could have a permanent scarring and you refuse to look at anything in that area. But that's the psychology surrounding TSB and that's why it's too cheap.
It's viewed with a lot of anxiety. I forced myself to have a very in-depth look at it despite my prejudices and it's a very, very unusual bank, incredibly low risk, massively overcapitalized, very, very conservative loan book, a very, very benign regulatory environment. Basically, the regulators want it to succeed because it wants new banks to be in there to challenge the existing ones. So it has this incredibly benign low-risk environment for it for the next few years. Won't always be like that but good opportunity now.
Wall: One of your equity income peers Neil Woodford recently – last year – bought a bank after the first time in 10 years and then dropped it last month.
Lang: He sold it, yeah.
Wall: He said it was because of the backdrop of extortionate fines in the banking industry. Is that not a concern of yours?
Lang: That's what makes TSB absolutely unique. It has zero exposure to legacy issues. It was one of the conditions of it being separated from Lloyds is that all those liabilities sit with Lloyds and not with TSB. So, it has absolutely zero regulatory risk.
Wall: And your third stock?
Lang: My third one is Sainsbury's (SBRY) which is a recent purchase of ours. We like going into areas where there is a lot of anxiety. There is lots and lots of anxiety in U.K. supermarkets at the moment, quite rightly because there is a big shift in what's going on there with the arrival – well, not really arrival because it's been around for some time, but with the deep discounters Lidl and Aldi causing a lot of problems. But our view is that the problems are very much focused on businesses like Tesco's (TSCO) and Morrison's (MRW) who have got some structural issues down there.
Sainsbury's has been through the mill for a long time because it got doffed up by Tesco's for a long period. They have finally learned their lesson. Our view is that they are just trying to stick to their standard kind of, if you like, middle-class customer base, not trying to do anything too flashy. They are kind of in a more survival mode at the moment. They are not getting dragged into price wars with the deep discounters. So, it's probably an okay business, but it's viewed like all the rest.
Wall: Sainsbury's I think had a bit of a sort of identity crisis. You mentioned there, it wasn't a Tesco. But that middle-class area is predominated by Waitrose. Is that not a concern for you?
Lang: Well, interestingly, they also had a – they tried to ape Waitrose as well. But the sort of subtleties of the demarcation of customers is – Waitrose is, if you like, right at the top and then there is this layer below which is kind of mass middle-class, if you like, where Sainsbury's sits and Sainsbury's attempted to go in both directions. They attempted to kind of beating out Waitrose, Waitrose at the same time trying to chase down and combat Tesco's and Morrison's and I think what they worked out is they don't need to do either actually that if they just go back to being not quite as good as Waitrose but not as expensive and a reasonably pleasant place to shop, which a lot nice than Tesco's, they can do perfectly well.
Wall: So it’s stick to the knitting?
Lang: Yeah.
Wall: Thank you very much, Jeremy.
Lang: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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