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A contrarian cheer for Marks & Spencer!
Alasdair McKinnon of Scottish Investment Trust explains why he buys shares like Marks & Spencer when they are out of favour.
It is fair to say the recovery plan for Marks & Spencer (MKS) outlined by its new chief executive Steve Rowe hasn't convinced investors but Alasdair McKinnon, manager of Scottish Investment Trust (SCIN ), is one who has high hopes for his food-focused growth strategy.
In this video interview McKinnon explains how Marks & Spencer is a good example of his contrarian approach that has improved Scottish shareholder returns in the past two years.
By seeking out unfashionable stocks McKinnon aims to buy stocks with good prospects before they are recognised in the share price.
Can't watch now? Read the transcript
Gavin Lumsden: Hello, with me today is Alasdair McKinnon, manager of the Scottish Investment Trust, a global portfolio that he's been running for nearly two years. Alasdair, thanks very much for joining me, now your's is a global fund, but you invest in the UK so we're going to start with talking about Marks & Spencer. Lot of interest in the company and in retailers at the moment. You bought into the stock last year, the shares haven't been doing very well so can you tell us what is the attraction of Marks & Spencer?
Alasdair McKinnon: Now you're quite right, we bought Marks & Spencer last year, in the summer to be precise. The reason we did that is really a reflection of our style. We are what we call a contrarian, high conviction, global manager and what we're really trying to do is to find stocks where people have got bored of the prospects of the stock, don't like the prospects for the stock but we see upside on a longer-term horizon. Now with Marks & Spencer what we saw was a very attractive dividend yield; a new management team; a new chief executive, Steve Rowe; and a plan to turn round the business which has underperformed, as you are probably very aware, for the best part of 10 years.
GL: The fashion side, the clothes side has been pretty dismal for a long time now.
AM: The cothing side has been poor whereas the food side has been excellent. And I think if Marks & Spencer could run the whole business the way they run the food division, it would be a top-performing business.
GL: So you bought in because the new boss Steve Rowe comes in and you're impressed by him.
AM: Very impressed by him. He's a retailer. So he's not a consultant who has grand plans but doesn't know how to implement it. He has worked on the shop floor and worked his way up the business and knows how to retail. So that is why were very encouraged by this new plan.
GL: Now in November they came out with half-year results: profits were down 19%, Rowe comes out with this plan to increase the emphasis on food and to close some of the stores selling clothes.
AM: That's exactly what we expected him to do. We were really pleased he did that and we think it's a really good plan to help deliver superior returns for Marks & Spencers in the longer run.
GL: And yet the shares have not recovered, there is a lot of bad news, there've have been a lot of headwinds, you know inflation going up, imports going up because of the weak pound. Are investors ... you know you say, you're a contrarian investor, other investors don't seem to share your optimism around Marks & Spencer.
AM: That's exactly what we expect. When you're a contrarian investor you buy when other people don't share your optimism. And what we do, we've analysed the situation and we're confident there's a very good chance that Marks & Spencer can turn itself around. If you look at the recent history of our results actually, we've got a number of good examples of contrarian stocks that we've bought when other people were scared about the prospects for the company going forward. The most successful one over the year was one called Treasury Wine Estates, which is a global wine company, Penfolds is its best-known brand. A lot of people when we bought it said it's got a very chequered history, the business can't be fixed. But there was a new management team that came in with a plan and we backed that management team and it started to perform extremely well.
GL: So the arrival of a new boss is a pretty good catalyst is it?
AM: It's often the most important catalyst because a new boss can make changes that the old boss can't. The old boss might have a strategy in place and he or she can't admit to the board of directors, to the market in general and their colleagues that they've made a mistake. A new person coming in has a blank seet of paper and can start again, particularly if performance has been bad. It's a clear mandate for change.
GL: OK. Now a lot of people would appreciate that buying shares when they're undervalued and when they're cheap is a good thing to do. It worked well for you on Treasury Wine, the new boss came in and the shares have more than doubled in a year, really contributing to the good results your fund had as well. Going back to Marks & Spencer, you're having to be patient with that stock, so how long do you give it, what's your time view?
AM: We haven't got a specific time view, we'll just keep monitoring the progress of the plan and so long as we're confident the plan is progressing and that Steve Rowe and his team are putting in place appropriate measures we'll comntinue to back that investment.
GL: Now you're a value investor, effectively, is that right?
AM: Not a value investor, a contrarian investor so what we're looking for is unfashionable stocks, not just cheap stocks. All stocks eventually become unfashioable. And on the flip side stocks eventually become fashionable. Now when stocks get fashionable they tend to get over valued. And when they get unfashionable they get under valued. And what we do is apply lateral thinking. So instead of just taking what everyone is saying about a stock today, we look forward and say what could change, for good or for bad about this stock. And what will we do in those circumstances?
GL: Ok Alasdair, well as I said the new approach has been reaping rewards on the fund, juding by its results so we'll may be come back to you in a year's time and see what new ideas you've been picking up for the portfolio. In the meantime thanks very much.
AM: Thanks Gavin.