Kernow Asset Management tear sheet for the month ended January 31, 2024.
The strategy declined 0.4% in January, holding up well compared to the UK market’s stumbling start to the year.
Several recruitment and plant hire companies delivered poor updates early in the month, aborting the customary January bounce before it had even begun. Christmas numbers from the retailers were mixed but skewed more towards the negative. This read-across hurt our largest position, Frasers Group. As usual, it has not yet updated the market post-Christmas, so we think it is still trading in line, having set a target that is not too ambitious for its financial year. If it does report a slowdown, we would most likely use this as an opportunity to top up our position, as it has no impact on our catalyst.
Q4 2023 hedge fund letters, conferences and more
Last month, we made a new investment in Burberry. This luxury goods company has high margins, a distinctive brand, and desirable international exposure. After a marketing failure in the early 2000s, the firm recovered in 2006 by focusing on its core story and product. This success attracted mainstream investors, building a restrictive consensus and a high rating. We think Burberry is worth c.£10bn, but we rarely see its price low enough to consider buying, except during global panics when we usually find better-returning trades for the same risk.
When Burberry recently fell to a 50% discount, we investigated. We identified a perceived China slowdown and a new UK VAT rule, but these seem fleeting and did not explain the excess fall compared to its sector. We went on to find four issues affecting the company: design, pricing, number of SKUs and excessive overheads. When compounded with a new management team, the market disillusion is understandable.
However, all four issues are within management control and can be fixed within 18 months. It is not a regulatory change, new competitor or invention challenging the company. We believe the CEO’s strategy will just take time to bed in, akin to all investment ‘J curves’. Our position is small, given the potential for a third profit warning. If this occurs, the stock will move from a ‘disappointment to hold’ to an ’embarrassment to hold’, and the old consensus shareholders will be forced sellers, fearing another Superdry.
Elsewhere in the portfolio, Mondi had a remarkable asset payout from its Russian disposal. Galliford Try upgraded its targets once more, and CMC Markets is ending its multi-year investment programme with cost-cutting underway and its B2B operations trading ahead of expectations.
The most audacious activity this month was in one of our short positions. The senior manager in charge of building its product quit abruptly. The company released an RNS that obfuscated this by waxing lyrical about the replacement NED parachuted in and burying the resignation announcement in the fifth paragraph of the release. The stock went up on the day. It is easier to fool people than convince them they have been fooled.
Another of our shorts, which we think is bankrupt, pulled off an equity placement to push any balance sheet issues out until 2026. Finally, our largest short position said its losses will continue to widen to c.£350m, despite its earlier promise of a breakeven year.
Outlook-wise, Calastone said UK equity inflows in January hit more than £2bn. This was the highest since April 2021 and the eighth strongest inflow month since it began recording. Alas, one month is not a trend. The UK remains deeply out of favour from an asset allocation perspective, providing ample opportunities.
Since its inception in November 2019, the Kernow strategy is up 31%, compared with the prevailing UK equity market, which has increased 20% over the same period. The collective upside in the portfolio is worth more than 235%.
- Book of the Month: Damsel in Distressed by Dominique Mielle
- Good month for: CMC Markets, +29%, on cost-cutting plans
- Bad month for: Watches of Switzerland, -47%, following a disappointing Q3 trading update
This month was busy on the operational front as we completed the transfer of our Fund ACD and Fund Administrator service to Yealand Fund Services Limited. We are excited about the switch and the ability to provide you with our contrarian investment strategy at a higher quality service level and a cheaper rate than before. As a result, the CG Kernow Equity Navigator Fund will be renamed the YFS Kernow Equity Navigator Fund. Investors do not need to do anything.
On the research side, we released the latest edition of our popular Kernow Journal. In this issue, we take an in-depth look at data. We use several real-world examples to show that it is important to construct models using data directly from primary sources. We also continue our exploration of the Kernow Valuation Framework, and finally, we end on a visualisation using geospatial analysis.
We had the opportunity to present insights from the journal to wealth manager Taylor Money during the month. If you’d like to talk to us about a session for your team, get in touch.
Kind regards
Alyx Wood
Chief Investment Officer
Kernow Asset Management
See the full tear sheet here.
