VT Tyndall Real Income Fund - Tyndall Investment Management

VT Tyndall Real Income Fund
Weekly Commentary | 30th April 2021

        Are we nearly there yet?
        Stock markets, as we know, are forward looking in nature and frequently move to price in events yet
        to happen. The phrase ‘travelling and arriving’ is a common one in relation to share price
        movements, essentially saying that by the time much anticipated ‘news’ hits the screen the share
        price has already factored it in ahead of time.

        With this in mind, we are having more and more discussions lately concerning whether or not the
        market has already fully priced the ‘reopening’ of the UK economy post lockdown. We will, of
        course, only know the answer for sure as time goes by. As it stands today though, our inclination is
        to think that is not currently the case and there is still plenty to go for in UK reopening opportunities,
        particularly consumer exposed stocks.

        There are several issues to think about when framing this debate and it starts with the scale of the
        economic hit the UK suffered in 2020. As we have mentioned previously, GDP growth of -9.9% was
        the worst yearly outturn for over 300 years. As such, the potential for an equally vigorous upside
        surprise to economic activity clearly exists as we exit our third and, hopefully, final national
        lockdown.

        Whilst the economic contraction was incredibly sharp in 2020 it was also extremely unusual, being
        driven as it was, by the enforced closure of much of the economy. The quid pro quo for enforced
        closure was truly unprecedented support from the government for businesses and individuals alike,
        and one of the consequences of this support has been a quite exceptional build-up of corporate and
        household excess savings, as the chart below clearly demonstrates.

        Those excess savings, particularly on the household side, are a key reason why we think there is still
        plenty more scope for UK consumer related stocks to perform strongly as we emerge from
        lockdown. There are numerous anecdotal signs of significant ‘pent up’ demand after over a year of
        rolling lockdowns and households, generally, have the financial capacity to fulfil that demand.

Another reason we remain so optimistic is the underlying strength of the UK housing market, a key
indicator if ever there was one, for the financial health of UK consumers. Not only did UK housing
surprise positively with its resilience in 2020 but, as the chart below from Rightmove of month-on-
month national asking price changes demonstrates, the market appears to be accelerating strongly
in early 2021.

Finally, the actual evidence on the ground also appears highly encouraging, as the latest UK retail
sales volume data from the Office for National Statistics (below) indicates. Very strong +5.4% volume
growth was seen in March, before non-essential physical stores had even reopened on 12th April.

So, we feel pretty optimistic that a sustained period of consumer strength, probably surpassing
current positive expectations, is likely still to come in the UK. Furthermore, when we drill down into
individual stocks in the area, we still find plenty of valuation appeal.

Three of our favourite stocks in the consumer space are JD Wetherspoon (pubs), DFS Furniture
(sofas) and Next (clothing and homeware). All three have incredibly strong franchises and all, in our
opinion, will emerge from the pandemic in a stronger position relative to their competition than
when they went in. DFS, for example, estimate they have taken an additional 2% market share
nationally over the last year as weaker players have exited the industry. They now have an
estimated 34% market share, over 3 times bigger than their nearest competitor.

The charts below, from Redburn Ideas, show all 3 companies’ profiles in terms of relative estimates
momentum (left chart) and return on capital (right chart). From an estimate perspective both DFS
and Next have already been surprising positively, reflecting the strength of their online propositions
during lockdown. JD Wetherspoon, clearly, has not yet started surprising positively as their pubs
have remained largely closed along with the rest of the hospitality industry.

What’s most interesting to us though, in each case, is the far right column of the right hand chart.
For each company the market is not yet, in our opinion, pricing future returns on capital in any way
excessively optimistically. In fact, we fully expect those return on capital ‘blue bars’ to continue
rising back towards levels more akin to historical performance in due course. On that basis there
would appear to be plenty of scope for further substantial share price recovery from here.

Our answer therefore is that, no, we aren’t nearly there yet. The UK consumer space still
offers plenty of alpha opportunities as the economy reopens, and our fund is really well
positioned to take full advantage.

Simon Murphy, Fund Manager, VT Tyndall Real Income Fund, 30th April 2021
Data source (unless otherwise stated): Bloomberg

Contact Details:

Fund Manager – smurphy@tyndallim.co.uk
Sales Director - hnolan@tyndallim.co.uk

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