Monthly fund manager commentary

Markets were mixed in February, with concerns over the impact of tariffs and a slowing US economy balanced by a possible end to the conflict between Russia and Ukraine and the benefit of lower oil prices. Against the background of concerns over the US economy in the latter part of the month, there were signs of consumer staples benefitting from their traditional safe haven status.

February is often the busiest month of the year due to the majority of portfolio companies (and peers) reporting full-year results, but this year was considerably busier than usual. Aside from the results, the two most notable events for our portfolio companies were the surprise change of CEO at Unilever and the news that Shiseido had attracted a new shareholder that "may make important proposals" to the Board. Whilst the news that Fernando Fernandez had been promoted from CFO to CEO came as a surprise, it is a change that we view very favourably. He has a clear view of what makes a great consumer staples business, and understands the importance of steady but sustainable (real) growth in volumes and mix, over time. With the right incentive structure, Unilever has one of the very best Emerging Market footprints that should enable it to deliver the necessary growth. Previous management teams at Unilever lost sight of the need to do simple things right, on a consistent basis, and were frequently chasing new areas of growth. A failure to focus on a company's core brands is one of the surest routes to value destruction in consumer staples. Unilever is one of the biggest positions in the portfolio, and we believe it has a very bright future under its new CEO.

News that Independent Franchise Partners had taken a 5% stake in Shiseido and that it "may make proposals" provided a welcome boost to the share price. Although only modestly higher during the month, the share price did end more than 15% above its lows, and yet it still trades at a derisory 1x sales. This is despite earning a slightly higher gross margin than L'Oreal (both are very attractive at over 70%), and yet L'Oreal trades at 4x the sales valuation of Shiseido. We would expect any proposals made to get a reasonable reception from the Board, given the steps it has already made in restructuring the business. It is also worth noting that new management incentives have just been introduced, which include Total Shareholder Return for the first time, so there should be a high degree of alignment with any options to improve the profitability of the business. We also note that this is part of a broader exercise in Japan to improve corporate governance standards, with a particular focus on the profitability and shareholder policies of companies. Both the Tokyo Stock Exchange and the Trade Ministry are encouraging these reforms, and to show there is substance behind these demands, over 20% of the companies on the broad Topix exchange were delisted in January for failing to make sufficient progress. Not surprisingly, all of our Japanese holding benefitted from the interest in Shiseido.

The biggest annual consumer conference (CAGNY) took place in Orlando, Florida in February, an event where over 30 of the world's leading consumer companies present their strategies for the medium and longer-term. One of the most interesting presentations this year came from Diageo, as it highlighted its own analysis of the US spirits market and why it believes the current slowdown is cyclical, not structural. In contrast to observers who have been suggesting that Gen-Z consumers are drinking less alcohol, Diageo was able to show that Household Penetration (a key measure) for this group was higher than its pre-Covid levels, for both spirits and total alcohol. It went on to highlight the cumulative impact of inflation on the average grocery basket, where it said costs are over 30% higher than 4 years ago. Within that, the amount spent on alcohol has remained largely stable at around 2% of total spend. Diageo also believe that, in addition to the headwinds from grocery inflation, consumer habits are still returning to a normal level of demand following an initial boost during Covid lockdowns. Whilst we don't own Diageo, we do agree with their industry analysis and have added to our positions in other stocks (notably Brown Forman).

The February reporting period has been notable for the share price performance of some of last year's laggards. Both Heineken and Nestle in particular reported results in line with expectations, but in both cases investors had feared much worse. That was enough for both share prices to rally strongly - they are now up almost 20% this year, and yet still trade on attractive valuations. Reflecting many of these attractive valuations, well over half of our portfolio announced share buy-backs for this year, in some cases quite sizeable ones.

During the month we added to our positions in Brown Forman, Estee Lauder and Unilever, taking profits in BellRing Brands and Interparfums. The top 3 contributors in the month were Heineken, Nestle and Lindt. The bottom 3 were Fever-Tree, Estee Lauder and Pola Orbis.