Brown Advisory exits Next as rivals close in

Lead manager Mick Dillon said he had begun selling the stock prior to a profit warning in March, which wiped 15 per cent off the company’s share price.

Mr Dillon noted that while the firm was among the “best retailers in Europe”, rivals had begun to challenge it by mimicking some of the company’s more innovative services.

These include its policy of offering next-day delivery until midnight each working day, according to the manager.

“Next’s online business has a 25 per cent operating profit. Its stores get about 15 per cent in operating profit. The catch was the other high street guys were slowly catching up [with the firm’s midnight offer]. They had a relative advantage rather than a competitive advantage because it was replicable.”

Next shares have slumped 26 per cent this year, largely due to warnings from the company that tough trading conditions “may be indicative of weaker demand for clothing and a slow-down in consumer spending”.

“We think the management is exceptional but worry the relative advantage is going away. Will they be able to sustain their high return on invested capital?” Mr Dillon said.

Elsewhere the managers, who target high-quality companies with long-term growth, have added to names such as Alphabet at the expense of others.

Mr Dillon said they had exited a position in DaVita, which offers kidney dialysis treatments, because it appeared unlikely to boost its return on invested capital (ROIC) as much as planned.

“We thought it would get to 20 per cent ROIC. But then we saw its biggest competitor has an ROIC of 8.6 per cent,” he explained. “When we look at the two-player market and one is happy with its ROIC, it makes it hard for the other to improve.”

He also reduced a position in Edwards Lifesciences, which manufactures heart valves, but added to online travel provider Priceline Group.

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