The manager (pictured) of the £4.4bn AXA Framlington UK Select Opportunities fund says despite a reasonably buoyant recovery, markets are still at risk from the legacy of the financial crisis.
“The after-effects are still being felt as governments try and reduce their deficits. Reduction of debt is deflationary. Many companies we meet are rising to the challenges of the new era, some are not. The next 12 months will carry a great deal of uncertainty through which to invest,” he said.
“Where are we in the current cycle? It is difficult to assess and separate the cyclical influences from structural change.”
“Productivity gains are difficult to create when globalisation and automation have pressured wages and stunted final demand. These issues cannot be addressed by monetary and fiscal policies in the short term.”
He says the majority - 56 per cent - of world gross domestic product (GDP) and 81 per cent of global equity markets are currently being held up by virtually-zero interest rates.
“The ‘tiny steps’ upwards in rates were expected in the USA and UK, whose economies have demonstrated GDP growth. 2015 could be the year for this to happen,” Thomas said.
“The UK stock market is partly discounting this event, but also has to anticipate the general election in May 2015. This leads to much uncertainty – witness the effects of the Scottish independence referendum.”
However Thomas says the UK economy looks to be performing well, particularly in car production, aerospace and digital commerce, while corporate tax rates are being eased.
“Car production has risen here by 50 per cent since 2009.The UK too now derives more GDP from internet-related expenditure than many of its competitors,” the manager explained.
“UK headline corporate tax rates have now fallen to 21 per cent and the effective rate - i.e. paid on average - is down to 16.3 per cent. The UK has the second largest aerospace industry - including defence - after the USA.”
Thomas, whose longstanding experience running money is paired with an enviable track record, has returned 292.16 per cent since taking over AXA Framlington UK Select Opportunities in September 2002.
By comparison, the IMA UK All Companies sector average over this period is 166.3 per cent while the FTSE All Share gained 174.38 per cent.
Performance of fund, sector and index since September 2002
Source: FE Analytics
The fund has also outperformed its sector in 10 of the past 11 full calendar years and beaten its benchmark in nine.
Thomas says following a takeover bid of a top holding - Shire Pharmaceutical by US firm Abbvie - he has been looking to divert capital gains back into other parts of the healthcare and pharmaceutical sector.
“One company that we hold and have added to recently, and have visited their Camberley site, is BTG. This company has grown out from its biotech roots and now encompasses three divisions: speciality pharmaceutical, interventional medicine and royalty income,” he said.
“Specialty pharma revenue is mainly from a product called CroFab, an anti-venom solution for rattlesnake bites in the USA, plus DigiFab for digoxin toxicity (for heart failure) and Voraxaze for methotrexate toxicity (in cancer chemotherapy) in US hospitals and on a named patient basis.”
He says this is a highly cash generative part of the business.
“Royalties come from discovered therapies/ drugs licenced to big pharma, almost entirely now earned on Zytiga, for prostate cancer, from Johnson and Johnson. The underlying drug is now expected to produce $2bn in revenue for Johnson and Johnson this year.”
The past year has seen BTG make decent gains in the stock market of 77.94 per cent in what has been 12 months of relative outperformance of the pharma sector relative to the wider index.
Performance of stock and indices over 1yr
Source: FE Analytics
Thomas has also added Royal Dutch Shell, believing the company is set for a boost to its earnings. “The group have indicated to the stock market that they plan to return in excess of $30bn to shareholders in 2014 and 2015. Given the expected level of dividend payments, this should mean $7-8bn of share buybacks over the same period.
“Recovery in Shell’s earnings is global, but a turnaround in their North American business is of interest. For most of 2013, the Americas division reported a loss.”
Shell saw moderate growth in its share price through 2014 but has been a recent victim of selling following the continued plunge in the price of oil. Shell’s stock is up 12.47 per cent over the past year.
Performance of stock and index over 1yr
Source: FE Analytics
AXA Framlington UK Select Opportunities has clean ongoing charges of 0.83 per cent.