Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and I'm joined today by Adam Avigdori, Manager of the BlackRock U.K. Income Fund to give his three sector picks.
Hi, Adam.
Adam Avigdori: Good afternoon, Emma.
Wall: So, what's the first sector today?
Avigdori: Staples, I think there's been a huge amount of debate over the last 12 months or 18 months about bond proxy type sectors and I think in staples they have been caught up in that broader concern. And we think in staples what the market is really under-appreciating is a long-term pricing power of so many of these businesses. And what the market is really not very good at, thankfully, for stock pickers like ourselves. It's not good at appreciating the long-term duration of both the growth and the ability of that company to grow its dividends and we see all those types of characteristics in the staple companies.
Wall: And what do you mean by a staple?
Avigdori: Personal care, tobacco, food. Ultimately companies that are selling millions, billions of everyday items and just doing that consistently.
Wall: Do they tend to be international players or both?
Avigdori: Typically, multi-nationals, yeah, absolutely. So, they typically operate in a large number of countries, selling a large number of brands and typically have been around for a long period of time.
Wall: And what's the second sector today?
Avigdori: So, the other end of the spectrum; food retail. So, probably from one highly rated sector perhaps to a lowly rated sector. And what we're trying to do in the BlackRock U.K. Income Fund is identify, not just high free cash flow companies like staples. But we're trying to find turnarounds, companies that have suffered temporarily, returns are low, they're at low multiples of book and food retail really does fit that bill. And this is a sector as well all know has gone through some difficult times, let's just leave it at that.
But what we actually see in the food retail sector is some inherent cash generative ability that's starting to come back. It's not quite getting back to where it used to be, but we are starting to see signs of stabilisation. And as we go through the next three years to five years with new management teams and some new refocused discipline on both costs and ultimately pricing, we think some of that cash generation is going to start coming back to you as shareholders and be reflected in the share prices.
Wall: And do you think it's that 3 to 5 year time horizon that gives you perhaps – makes you brave enough in order to invest in a sector like food retailers, which has been so talked down and has been so out of fashion in the last couple of years?
Avigdori: Well, I think you have to look at it broader and I think you have to take a step back from the monthly and quarterly like-for-like. I think that is incredibly noisy. And what you have to effectively try and do is identify long-term trend. And hopefully that trend is increasing volumes and ultimately increasing footfall.
Those two ultimately are the most important factors when it comes to a food retailer because ultimately it's an industry that is defined by the economies of scale. The more people that are spending more amount of money in your shop and doing that consistently is a good thing for both profit and cash. And really that's what we are trying to focus on.
Wall: And what's the third and final sector?
Avigdori: And the third and final sector is the media sector. And what we are trying to do here is identify those businesses that have been able to move from the print world – the old world to the new world, which is digital. And to do that successfully. Now that has been an incredibly tough journey for the vast majority. But what we are trying to do is identify those sort of franchises that have been able to do that successfully and we're really trying to identify international businesses that we think would be attractive to international buyers as well.
And we've seen some of that over the last 12-18 months in the U.K. market. And we're really trying to identify those companies that maybe M&A candidates, which we actually see across the U.K. market, particularly given the fall in sterling.
Wall: And is regulation something that you have to consider in operating in this space as well because there have a number of sort of media and indeed tech companies that have fallen foul of the regulator when it comes to M&A?
Avigdori: I think you have to look at regulation for everything these days. The government and politics is very much part of the economic cycle. We saw that most with Brexit. But you are absolutely right. I think with the media companies, in particular, you have to be very clear about what the company's mandate is and how their mandate would change, and what their plans are with regards to how the government regulates their industries.
Wall: Adam, thank you very much.
Avigdori: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
