Bill Jamieson: There are no off–the–shelf answers for Tesco

TOP fund managers Neil Woodford of Invesco Perpetual and Nigel Thomas of AXA Framlington have pulled out. Warren Buffett, the veteran investment guru for millions, has piled in, raising his shareholding to 5 per cent. Who are we to follow on Tesco? Should we buy or sell?

Last week, group chief executive Philip Clarke unveiled a lacklustre 1.3 per cent rise in trading profits to £3.8 billion, a fall in UK profits and confirmed a blockbuster £1bn plan to revamp hundreds of UK stores. Part of this will be funded by cutting back on its helter-skelter store opening programme.

Now that the dust is settling, what is the outlook for Britain’s biggest food retailer? And does management have a credible plan to restore its fortunes in the UK?

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Shares in Tesco suffered a painful hit back in January after Clarke first sounded a warning over group profits. That was a shock. Tesco has for years been a core holding in many portfolios, a share in a company of which many are also customers. Its dominant position in food and convenience retailing seemed to make it immune from the sort of traumas that can befall small, niche businesses. Tesco is hardly small, or niche.

But it has, in both retail and investor terms, fallen sharply out of favour. Far from the profit warning proving a momentary shock, quickly remedied by a new price or discount campaign, it has opened up searching commentary on “what’s gone wrong with Tesco” and criticism that its stores, successful for so long, are now suddenly considered cold and dowdy.

Tesco shares are showing a 19 per cent loss over the past 12 months and are yielding an ex-growth looking 4.6 per cent.

Putting this right is clearly going to take more than a lick of paint. Tesco’s predicament is that size alone is no guarantor of brand success. It has to manage this investment in the face of fierce competition and the continuous push-pull of customer preferences: reliability and predictability on the one hand and the quest for something different and new on the other.

Buffett may be right in a longer-term assessment of a stock with the management experience (and now dividend yield) of Tesco. But Woodford and his colleagues are also surely right in their judgment that this going to be a long haul rather than a quick fix. Investors are going to need patience for this tanker to turn.

Ro-Ro is steering the boat, so get used to it

The phrase du jour in volatile markets is “Ro-Ro” – “risk on-risk off”. It hardly seems worthwhile undertaking detailed company research when share prices across all sectors and geographies are now governed by the daily ebb and flow of risk on-risk off swings in market mood.

A flickering in the growth rate of China or the outcome of the French presidential election can trigger a “risk off” day when everything is dragged down. In the post Lehman world, it matters little whether you are invested in Asia Pacific or in UK smaller companies: all stocks, all sectors and almost all asset classes can rise and fall together.

While leading economies continue to grapple with deficits and debt and central banks continue to resort to emergency actions such as quantitative easing, the reign of Ro-Ro is set to prevail – and there is little to suggest any imminent change.

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That said, there is evidence of a broad, if glacial pick-up in growth. It is still fragile enough to be stalled or reversed by event shocks in the eurozone or a slowdown in China. But there are grounds for hope for investors prepared to take the long view – five to seven years.

With the onset of the Retail Distribution Review, saving through investment trusts should start to enjoy a much greater profile. Ahead of this, one of the investment sector analysts, Alan Brierley of Canaccord Genuity, has produced an outstanding 76-page investment trust guide, covering both core holdings and those more suited to a “risk-on” environment. There are clearly written and well balanced analysis notes on 25 leading trusts. This should be of particular help not only to independent financial advisers but also to private investors, whether long in the tooth or starting out.

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