UK equity income, emerging markets and defensive funds of all stripes have built up large positions in Unilever and analogous stocks.
With stocks in companies that share Unilever’s profile following the firm down, most investors will be affected by the slump, with many feeling it through a number of different funds.
Unilever said it expected sales growth of 3 to 3.5 per cent in the third quarter, down from 5 per cent in the second quarter, with falling demand in the struggling emerging markets to blame.
Shares fell 3.36 per cent yesterday and opened down a further 1.49 per cent today, with stocks such as Diageo and Reckitt Benckiser, which share the dependence on emerging markets, following it down.
While the profits warning shocked many investors, the shares in these stocks have shown weakness for some time.
Data from FE Analytics shows that Unilever is down 13.83 per cent over six months, having peaked in April of this year; Diageo is down 4.38 per cent and Reckitt Benckiser 4.17 per cent.
Performance of stocks over 6 months
Source: FE Analytics
Unilever is a top-10 holding in 91 different IMA funds, including nine IMA UK Equity Income funds, 30 IMA UK All Companies funds and four IMA Global Emerging Markets funds – including the three major First State funds.
The slump will be a major blow to First State in particular, which has been shifting into stocks that sell into the emerging markets rather than those that are listed in the developing world.
Manager Jonathan Asante blamed the poor quality of companies on the emerging market indices for the shift in strategy, while the group is said to be considering listing its First State Emerging Markets Leaders fund in the IMA Global sector.
The single biggest holding in Unilever as a proportion of a fund is that of FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity, which has 8.5 per cent of AUM in the stock. First State Worldwide Equity has 7.5 per cent and Evenlode Income 7.4 per cent.
Other equity income funds that hold it in their top 10 include Aberdeen UK Equity income, Rathbone Income and Threadneedle UK Equity Income.
Funds with the highest proportion of assets in Unilever
| Fund | Holding in Unilever (%) |
|---|---|
| Lindsell Train - CF Lindsell Train UK Equity | 8.5 |
| First State - Worldwide Equity | 7.5 |
| Wise Investments - Evenlode Income | 7.4 |
| Morgan Stanley - Global Brands | 7.36 |
| SJP - Global Emerging Markets | 6.6 |
| Lindsell Train - Global Equity |
6.4 |
| CF - Purisima UK Total Return | 6.22 |
| First State - Global Emerging Markets Sustainability | 5.9 |
| First State - Worldwide Sustainability | 5.7 |
| First State - Global Emerging Markets Leaders | 5 |
Source: FE Analytics
Train also has a large position in Diageo – at 8.8 per cent it is the only larger position than Unilever in the fund – but he says that he is unconcerned by recent performance.
"Unilever’s current wobble is a useful corrective to the still prevalent view that big, boring defensive shares are the darlings of the market and can do no wrong," he said.
"Some would argue that this is the beginning of a prolonged period of underperformance; for us it’s just a healthy correction, typical in their long histories of overall wealth-building for owners."
"Unilever attracted disapprobation in August because of its exposure to emerging markets, particularly India, and you will all now be familiar with the unravelling of investor confidence in the EM story."
"With the highest exposure to EMs of any of its peers and, we estimate, circa 7 per cent of its sales in India alone, Unilever is at the eye of this disenchantment."
"Unilever’s annual dividends have risen from 6.9p in 1988 to 86p in 2012/13 and this wonderful history of cash return must be related to the company’s historic advantaged position in those parts of the world with growing populations and rising disposable incomes."
Commenting before the latest leg-down, Train noted that the stock was cheaper than its peers, a divergence that will only have widened after recent events.
"Unilever continues to be valued at the lowest price/sales ratio of any of its peers," he said. "£1 of its sales is valued by investors at £1.60. Compare Reckitt at £3.20, Colgate £3.20, P&G £2.50 and, next cheapest, Nestle at £2.10."
However, it is noteworthy that the MSCI Emerging Markets index has spiked as Unilever and its peers have slumped.
Performance of stocks vs index over 6months
Source: FE Analytics
One of the reasons for Unilever doing worse than expected is the poor performance of many of the major emerging market currencies, with the Indian rupee particularly badly exposed this year.
Performance of currencies against dollar over 1yr
Source: FE Analytics
Western currencies have strengthened against those of these countries and it seems that there is now evidence of emerging market-listed stocks doing well off the back of this. Companies listed in emerging markets will have costs that are denominated in the weakening currencies, as well as revenues.
Tom Tuite Dalton, analyst at Oriel Securities, says Unilever’s profits warning undermines a popular investment strategy of avoiding emerging market-listed companies and accessing the markets indirectly. The limitations of this approach are now clear, he says.
"A popular attitude in recent years has been to dismiss emerging markets-listed companies as being broadly corrupt, lacking strong brands and lacking transparency," he said.
"Why not simply invest in large, liquid and transparent western companies like Unilever with high-quality brands to benefit from emerging markets growth?"
"Today the argument for dismissing emerging markets funds appears far from clear-cut: whilst there may be no need to invest directly in emerging markets funds to benefit from emerging markets growth, given current valuations, and weaker currencies, so doing may now actually be the most effective way of benefiting from emerging market growth," he added.
"Western companies exposed to emerging markets is a now well-worn theme and much of that future growth is arguably already priced in."
"Emerging markets and Asian funds, however, have fallen out of fashion in recent months and, as a result, are arguably more attractive, even if discounts are not especially wide."
