The fund manager takes the view that while the prospects for the US consumer are improving, thanks to rising rates of employment and wages, ‘the shops, the retail sector, which might in the past have benefitted from a positive consumer outlook are a part of the market we are eager to avoid. People seem to need less “stuff” so retailers are losing share of consumers wallets not just to online retailers, but also to activities such as gambling and social media.’
He is keen to invest in companies such as barber and beauty salons, ‘the internet can’t give you a haircut.’
Of the retailers he commented, ‘We have seen in the past how tricky ‘brick and mortar’ retail can be when sales start to fall. The combination of high fixed costs and unsold stock leads to rapid margin declines and, when combined with high debt levels, the rapid demise of what seemed like large and successful businesses.
In the US, J C Penney and Macy’s are clearly under pressure and in the UK the strain is being felt by Matalan and Debenhams. This is despite an otherwise healthy state of the consumer. So, we would avoid these types of retailers and only have exposure to specific niches or beneficiaries, such as Home Depot, Amazon and Netflix. Our positive view of the UK and US consumer can readily be expressed through exposure to leisure or home building, without the need to look at retail.’
He said that investing is to a very large extent, ‘about avoiding the losers, rather than picking the winners.’
Jane added that companies such as Amazon may actually be more profitable than they appear because, ‘when they expand its wage costs that go up, so that goes straight into the accounts as an expense, the full amount. Whereas a more traditional company, when it expands by buying a building or machinery or stock, the cost of that is depreciated in the accounts over many years.’
The fund manager said that the valuations of the US technology names are generally less attractive than those of comparable Chinese internet stocks such as Tencent or Baidu.
Jane next turned his thoughts to the areas of the market that will benefit from the strong outlook for consumers, and singled out the house builders and home improvements sector. He is invested in Home Depot, and Masco, amongst the home improvement companies.
DR Horton and Lennar are amongst the US housebuilder shares he has bought.
He runs the Miton Cautious Monthly Income fund, which has returned 30 per cent over the past three years, compared to 19 per cent for the average fund in the IA Mixed Investment 20-60 per cent shares sector.