JOHCM’s Costar reduces exposure to consumer staples

JO Hambro Capital Management’s (JOHCM) Mark Costar has warned that popular consumer staples stocks could be hit by profit warnings in the near future as consumers “trade down” to cheaper options.

Mr Costar, manager of the £284.3m JOHCM UK Growth fund, has been reducing exposure to companies such as Diageo and SABMiller for the past 18 months and now has no holdings in this sector.

The manager said consumers were likely to react late to the recession in their spending, with most only beginning to “trade down” to cheaper options for food and drink – a move that he said would hit company margins as it accelerates.

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“In a downturn companies react quickly and shrink their balance sheets, but consumers are the opposite,” Mr Costar said.

“There is no growth in wages and at the same time fuel costs, energy costs and taxes are going up. Eventually consumers will adjust [and] trade down to cheaper options. That cycle has begun already.”

He also cited the improving sales figures from low-cost supermarkets such as Aldi and Lidl as another sign that consumers were looking for cheaper options.

The manager said: “This is happening at a time when investors believe these companies can do no wrong. There is a combination of deteriorating fundamentals and investor complacency. One day soon there will be a big warning in the sector.”

SABMiller – brewing giant and owner of Foster’s and Bulmers – has seen its share price rise by 56.1 per cent in three years and more than 10 per cent in 2013 alone. Meanwhile, shares in its rival Diageo have risen 71.7 per cent in three years and 11 per cent in 2013.

Mr Costar admitted he had been “too early” in selling out of the sector but maintained he “will be proved right”.

Elsewhere in the fund Mr Costar said he had the lowest weighting to mid-cap companies since the fund’s launch in 2001. The manager said this had been driven by the performance of companies listed in the FTSE 250 index combined with a decision from many small-cap fund managers to move up into investing in medium-sized companies.

Mr Costar claimed some smaller companies of less than £300m in size were “dramatically” undervalued by the market by as much as 100-200 per cent.

He also claimed the small-cap sector had become “uncompetitive” in terms of the amount of managers focusing on companies below £500m in size, saying some had become “essentially mid-cap managers in disguise”.

The manager said: “There is a very high level of investor disillusionment [with small-caps], but they are improving in spite of what appears to be a quite sluggish earnings environment.”

The JOHCM UK Growth fund – a member of the Investment Adviser 100 Club of outperforming funds – ranked in the top quartile of the IMA UK All Companies sector in one-, three-, five- and 10-year periods to October 22, according to FE Analytics.