The brave calls of a punchy player

Martin Walker, true to the style set by his predecessor on Invesco Perpetual UK Growth, gets top-quartile performance on the fund with some surprising stock picks … Dixons? Now?

Patrick Collinson 2012 byline 160

Comet is currently on the brink of going bust as consumers ditch bricks-and-mortar stores in favour of Amazon for their electricals. So it may come as a surprise that the stock Invesco Perpetual’s Martin Walker is most enthusiastic about is Dixons Retail, operator of Currys. Is he a few wires short of a full circuit?

A decade ago Dixons was trading at 350p, but collapsed to just 9p by the beginning of this year as fears grew that it might struggle to generate enough cash to repay a £160m bond falling due. Just last month it closed down its website, the last vestige of a once-iconic electricals brand. But Walker, manager of Invesco Perpetual’s £815m UK Growth fund, is confident that it can bounce back, albeit under the Currys brand.

Comet’s demise, plus healthy sales of flat screen television for the Olympics, has already spurred a rebound in Dixon’s share price. On the day Comet said it was heading into adminstration, shares in Dixons rose a whopping 13.5 per cent, although they are still at just 23.4p.

“They are in a unique position. Best Buy are no longer a presence, and Comet, well who knows. Dixons did have a problem on price – its goods were indexing at around 120 versus 100 at Amazon, but through cost cutting they have managed to reduce that to 105 and are moving to 103,” says Walker.

Amazon is an intense competitor, but the electrical manufacturers are keen to avoid its total dominance. “The suppliers want Dixons to exist. It’s much harder to convince shoppers to trade up to a better model when they are online rather than in a store. At Currys, the assistants are also better placed to sell things such as electrical leads, where margins are high. With the tailwind of better consumer confidence, combined with larger market share, they could do very well,” says Walker.

He admits, though, it has been a rollercoaster ride in the shares, buying at above 20p, and then buying more when they were down at 9p-12p.

It’s a brave call. But Walker is used to taking punchy positions and runs a portfolio that is about as far away from an index-hugger as you can be. In that way, he continues with the style set by his predecessor on the fund, Ed Burke, who handed over the reins in 2008. Walker has more than taken up the running, achieving top quartile position over both one and three years on the fund.

In some ways the portfolio looks more like a UK Opportunites rather than a UK Growth fund, given some of the chunky positions Walker takes. For example, Rentokil is his fourth-largest holding at 4.5 per cent of the fund, only slightly less than his holding in BP, and with the likes of HSBC, Shell, Glaxo and Vodafone nowhere to be seen in his top 10.

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Walker is betting that Rentokil will ditch its loss-making parcels business, City Link, and new management clean up a company with a troubled recent history. “Without City Link, Rentokil should be trading on 12 times rather than the 8-9 times it is only currently. I think it could see a 50 per cent gain over the next three years or so,” he says.

Walker runs a portfolio of between 45 and 50 stocks, with none less than 200 basis points. Like his illustrious colleague Neil Woodford, he’s a stockpicker at heart, but given the financial crisis and fears that the UK will flat line for some time to come, he perhaps has little choice but to be drawn on the medium term outlook for the market and the economy.

“Over the next 10 years there is, I think, significant upside in the market – both from GDP growth and from the reinvestment of retained earnings. The market does look attractive compared to history… although investors have to expect continued volatility.” He’s not overly optimistic about GDP growth, but even if it’s just 1-2 per cent, once you add in inflation of 2-3 per cent, then add in market share growth, the returns on many stocks could actually be quite potent.

In a volatile market, the winners should be those who trade more to take advantage of frequent price swings. But Walker’s not so sure. “If I thought I could add value through market timing, then yes, that would be true. But it’s not our pitch. With stocks such as Dixons I think we can make significant alpha over the medium term.” Turnover in the fund is just 30 per cent a year.

Asset management is currently a theme in the fund. If you believe, as Walker does, that the market is undervalued, then fund management companies are a leveraged play on recovery. The long-term shift out of equity and into bonds may also have run it course, he believes. Walker holds Schroders and Jupiter, plus L&G and Resolution among the big insurers. He’s a particular fan of Schroders non-voting shares, which he says are trading on just eight times earnings once you strip out cash on its balance sheet. He also sees market share gains among the major fund management names from regulatory change. “The also-rans won’t do so well under RDR,” he reckons.

The problem if you’re an individual running money at Invesco Perpetual is that everybody looks like an also-ran when compared with Woodford. And when you’ve already allocated a large part of your cash to Woodford’s UK equity fund, why would you buy another Invesco Perpetual UK equity fund? At least in Walker Invesco Perpetual have a decent answer.


Patrick Collinson is the Guardian’s personal finance editor