BlackRock’s Nigel Ridge reflects on gambling and retail in the UK – and explains why he likes volatility.
In the two years since Nigel Ridge of BlackRock was appointed as the manager of the UK Absolute Return fund, UK equity markets have navigated a number of economic and geopolitical shocks. Against the backdrop of volatile performance for broader investment markets, the fund has enjoyed strong returns over the period, thanks to Ridge’s strong stock-picking abilities.
It is often in light of such successes that managers begin to wind down their positions, calculating that a given company has now had its success priced in, with little upside remaining. Yet Ridge still finds many of the same companies compelling – even two years later.
“We’re very confident about these names continuing to drive performance,” says Ridge. “One I would highlight in particular is Betfair. When we introduced it into the fund, it had great intellectual property but was really struggling to turn it into commercial application – in fact, others in the gaming industry were doing much better.”
‘Intellectual property’ is a term used to describe the intangibles owned and legally protected by a company, and can include patents, copyrights, ideas or trademarks.
Two years ago Ridge met with the new management team and was duly impressed, initiating a position in the company when the price was a little over £9. Today it is at around £32.50, aided by the tie-up recently announced with Paddy Power. But Ridge isn’t planning on divesting any time soon.
“Allied with Paddy Power, it is an extraordinarily powerful proposition, not just in the UK but around the world,” says Ridge. “The company is going from strength to strength.”
Central to the fund’s strategy, which aims to deliver positive returns in all market conditions, is the ability of the manager to hold both long and short positions; the latter providing the potential to benefit from falls in the share price of a company. Ridge’s big short position was in UK supermarket retail stocks – the last two years have proved it to have been a wise choice.
“There are a lot of competitive pressures in UK food retail,” says Ridge. “Firstly, much of it has gone online; hence the success of companies like Ocado. That means new capacity, of course, but so too does another pressure: the austerity-era move towards using discount retailers like Aldi and Lidl, who have also increased outlet floor space. Lastly, there’s a great deal of pressure on the high street, as more traditional stores close down, which means food retailers are now opening convenience stores. Again, that’s new capacity.”
Over the past 20 years, UK food retailers invested a great deal of money in out-of-town supermarkets, but Ridge says that consumers increasingly want to go elsewhere to buy their groceries. Share prices have responded; Tesco’s share price today is little more than half its value two years ago.
The big retail chains have reacted strongly to these developments, with management overhauls, dividend cuts – or, in the case of Tesco, cancelled dividends. Increasingly, the focus is on cutting capacity instead of extending it. As a result of these recent developments, Ridge has started to wind down his short positions in food retail.
You could be forgiven for thinking that this change of sentiment is linked to the relatively calmer days seen more recently in markets, after the turmoil of August, when shares plummeted and volatility spiked.
In fact, Ridge sees volatility as a help, not a hindrance.
“Volatility is our friend for two reasons,” he says. “Firstly, if volatility goes up, then it is really hard work to make absolute returns in equities, which then makes our proposition all the more attractive. Secondly, we’re focused on fundamentals, so when prices go up and down more, we can effectively pick off good ideas at great prices – or, indeed, short some shares that become dramatically overvalued. For the benefit of this strategy, I’d rather exist in a world where there’s a bit more volatility.”
Nigel Ridge is the manager of the St. James’s Place UK Absolute Return fund. The opinions expressed are those of Nigel Ridge and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
Please be aware that past performance is not indicative of future performance. The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Returns on equities cannot be guaranteed.