Please ensure Javascript is enabled for purposes of website accessibility

Look beyond the UK when it comes to income

HOT

Henderson Opportunities Trust plc

Back to Insights

Yesterday’s failures can be tomorrow’s leaders

While some companies are virtually written off in periods of challenge, watching for the signs of recovery can be beneficial to an investor, as Henderson Opportunities Trust has discovered with Marks & Spencer.

It was a few years ago, but I still remember the moment vividly. I had nipped out of the office at lunchtime for a snack at Marks & Spencer and picked up a nice little box of cherries. My mouth was watering, but I nearly choked when I saw the price – £7. Suffice to say I returned them to the shelf and bought an apple.

It was just one symptom of the many things that were wrong with M&S, as we all know it. One in three women may have still gone there for underwear, but that was about all they seemed to be buying.

A brand once synonymous with affordable quality had lost its way. M&S could not cope in the face of tough competition from much cheaper, more fashionable rivals and the rise of online shopping.

But in September 2017 M&S got a new chairman – Archie Norman. I remembered him from his days at Asda, and my ears pricked up. We began tracking the company, joining analyst calls.

It was clear from early on that Norman was no ordinary chairman, there to apply a gentle hand to the tiller occasionally. He happily tells you that when new management arrive they have to do so with a “thunderclap”. He did.

There were big changes among the senior team. One of his best hires was former Top Shop fashion director Maddy Evans, who has transformed the women’s range and is garnering coverage in the feature pages of the national press.

They cut costs, closing unprofitable stores (though they are now selectively opening some again). They shrank product ranges. If I had wandered upstairs to the men’s department that day of the cherry incident I would no doubt have been faced with a bewildering array of trousers that looked virtually identical. What was the point? Rationalising the lines has allowed M&S to increase order sizes, which means the “cost per unit” has fallen – savings passed on to the customer. It has also meant stores are more likely to have the right size for you on the peg.

In the food department the business has focused on providing the basics at competitive prices, which means more people are passing through. And once there they can be tempted with tasty ready meals, which are probably still cheaper than a takeaway but feel like a luxury treat. Affordable quality is back.

When they hear we own M&S shares, friends who would once have been embarrassed to shop there confess they are regulars again – and not just for pants and socks! The share price has nearly doubled this year.

What does that tell you about companies? I think it is a useful reminder that tomorrow’s winners can often be found in yesterday’s losers rediscovering their mojo. Another example of that this year is Rolls-Royce – another holding – up 187% this year (to 6 December 2023), only months after its new boss described it as a “burning platform”.

Companies change. They have no choice. It is remarkable when you look at the FTSE 100 how many of those businesses started out in the 19th century doing something completely different. But a company like Smiths, which began life making wristwatches for the Admiralty in a time of sailing ships, would not be a multinational giant today if it had not evolved. It now makes airport security equipment!

Change is often a response to challenge and crisis. And management do not always get it right. The market can take a long time to notice when they do. Here lies the opportunity.

Signs of positive change include new management willing to make necessary changes that their predecessors could not or would not. Companies confronting costs and making difficult decisions are worth watching. Sometimes these are palatable only in times of difficulty. We have seen that this year with Yorkshire buildings supplier Marshalls closing a factory in Scotland and trimming around 400 jobs.

Another promising sign is when management focus on what matters most. That can mean selling non-core businesses, as Rolls-Royce has this year. It can mean focusing on delivering affordable quality, as M&S has.

There is always an element of luck at play. We have seen businesses doing the right thing but thwarted by events, like Covid. This is why we diversify.

It is hard to describe the satisfaction I get as a fund manager when I see a recovery plan work at a company I have backed – often to the puzzlement of others. Does life become just a bowl of cherries? It can feel that way, especially now that M&S sells them for just £4.25.

Glossary

Diversification – A way of spreading risk by mixing different types of assets/asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.


Disclaimers:

Past performance does not predict future returns.

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK  Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc

Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.
    Specific risks
  • Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
  • The portfolio allows the manager to use options for efficient portfolio management. Options can be volatile and may result in a capital loss.
  • Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices and financial reporting standards.
  • Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
  • This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
  • The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
  • The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
  • If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.
  • All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.