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Sainsbury’s floored by competition watchdog

Tom Stevenson

Tom Stevenson - Investment Director

One of the things you accept when you invest in smaller companies is the potential for share price volatility. With blue-chip stocks in the FTSE 100 you hope for a smoother ride.

It certainly didn’t feel that way this morning after the Competition and Markets Authority (CMA) delivered its preliminary findings on the proposed merger between Sainsbury’s and Asda. Its unusually-strongly-worded conclusion saw Sainsbury’s shares drop by 15%.

Sainsbury’s floored by competition watchdog

The CMA said that it had ‘extensive concerns’ over whether a deal could be put together that would not significantly undermine supermarket competition in the UK.

It predicted higher prices in-store, online and on the forecourts. As if that were not clear enough, it said that a deal would reduce quality and choice and create a ‘poorer overall shopping experience’.

The watchdog said it had two options - outright prohibition of the deal or demanding a set of disposals to remedy the areas of overlap. Unfortunately, it added that it couldn’t see how any plausible sell-off of assets would solve the problem.

The market quickly took that to mean: the deal’s off. The supermarkets still have the chance to dispute the findings (and they will - Sainsbury’s boss Mike Coupe is spitting tacks). But, weighing up the probabilities, investors seem to have already made up their minds.

It is not hard to see why the CMA would have come to the conclusion it has. The enlarged group would have become the largest grocer in the UK. With 30% of the market it would have overtaken the current market leader Tesco and the two together would account for almost 60% of all food retailing in Britain.

But the announcement has nonetheless come as a shock to investors after previous, more lenient rulings from the regulator, including about Tesco’s takeover of Booker. Sainsbury’s and Asda’s righteous indignation is not unreasonable.

From an investor’s point of view, there are a couple of very clear messages from today’s bombshell. Both have a suitably foody tone: don’t count your chickens before they are hatched; and don’t put your eggs in one basket.

Investing is a game of probabilities. Until a regulatory ruling is final, you should always factor in the chance that it might go against you. Today’s share price collapse suggests that investors may have been guilty of over-optimism.

The scale of the fall in Sainsbury’s share price also underlines the importance of keeping a well-diversified portfolio. In the unlikely event that your whole portfolio was invested in Sainsbury’s shares you would be nursing an extremely painful loss this morning. In the more likely scenario that the supermarket is just one holding among many, you will be taking this unwelcome news on the chin.

Even the most concentrated of investment funds (like the Lindsell Train UK Equity Fund, for example) will have at least 25 holdings. In such a case, the biggest holding is unlikely to account for more than 10% of the assets in the fund. A 15% fall in the value of one of these would represent just 1.5% of the value of the overall fund. Not nice but manageable.

Most funds enjoy much wider diversification than this. Take the Fidelity Special Situations Fund, for example. It has 85 holdings, with only two of these representing more than 5% of the fund’s assets.

For investors who want even more diversification (not just between individual holdings but across geographies and asset classes too) multi asset funds offer a potential solution.

A year ago, we launched the Fidelity Select 50 Balanced Fund. It holds around 30 different funds, each of which, of course, holds tens of individual investments. These funds invest in a wide range of the world’s main share and bond markets, plus some property and commodity investments for further balance.

Our share dealing service enables investors to buy individual shares. That’s great when you have a specific investment need that only one company can deliver. But when putting together a portfolio that includes company shares, it’s good to remember that even blue-chip companies like Sainsbury’s can have a very bad day at the office.

Five year performance

(%) As at 19 Feb 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
J Sainsbury PLC -18.2 1.6 7.7 -2.8 18.5

Past performance is not a reliable indicator of future returns

Source: Fe, as at 19.2.19, in GBP terms with income reinvested

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities/funds should not be construed as a recommendation to buy or sell these securities/funds and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. The LF Lindsell Train UK Equity Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.