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Fund managers shun Tesco despite ‘better-than-expected’ results

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17/04/2014
Tesco's better-than-expected results have failed to tempt UK fund managers to buy in to the troubled retailer.

The supermarket giant’s full-year results announced on Wednesday morning showed a 6 per cent drop in annual profits to £3.3bn, while like-for-like sales fell by 1.4 per cent.

Dismal as they may be, the results were better than analysts – already pre-warned of troubles by Tesco’s management in a series of recent bearish statements – had forecast.

As a result shares, which have been trading around a 10-year low in recent weeks, were up 2.4 per cent to 293.15p by mid-afternoon Wednesday, having climbed as much as 5 per cent in the morning.

But while the company did enough to beat forecasts of a 10 per cent decline in profits from some analysts, fund managers continue to avoid the sector, warning there are too many headwinds facing Tesco and its competitors Sainsbury’s and Morrisons.

Managers highlighted the ongoing threat posed by discount retailers Aldi and Lidl, who are mounting a price war against their more expensive rivals.

George Godber, manager of the Miton UK Value Opportunities fund, said: “Tesco has a rudderless existence at the moment. The results were unequivocally poor, the strategy outlook seems pretty unconvincing, and dividend payments are unsustainable.

“We do reguarly consider supermarkets as we feel they could be a value opportunity in the future, but we are not investing yet and [yesterday’s] results have not changed my view.”

Alex Schlich, UK equity manager at Four Capital Partners, added: “We are keeping an eye on it but its profits are vulnerable and we are concerned about the competition from discount retailers.”

Others were less damning however. Investec Asset Management’s Alastair Mundy said Tesco had become lulled into a false sense of security after dominating the UK market, but he has begun buying again on the hope the company improves from here.

“Tesco went from an investment so good that it was seen as untouchable to one that is now untouchable in the bargepole sense of the word,” he said.

“We are not saying Tesco is brilliant but it is also not appalling. We are buying it on the expectation that things will change.”

Chris White, fund manager at Premier running its UK Growth fund, said the results were better than expected, although he conceded that was in part due to a much better performance from Continental Europe.

“It seems there is a reluctance to lay down a challenge to Aldi and Lidl over pricing in the UK, so the answer seems to be continuous investment over a number of years. Investors will require patience but at least they are compensated by a 5% dividend yield.”

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