Things will not necessarily get better or worse, but will become different and those companies that can adapt have the best chance to survive and prosper, according to AXA Investment Managers’ Nigel Thomas. 
“As investment managers we not only monitor and adapt to this change, but scrutinise company management teams to see if they are doing the same,” he said.
Indeed, it is a key theme within his £3bn AXA Framlington UK Select Opportunities fund, with two of the three stock picks below listed among the portfolio’s top 10 holdings.
Last month it was announced that Thomas (picturted) would be retiring in March 2019 after a 40-year career in the asset management industry, with FE Alpha Manager Chris St John set to take over the fund at the end of the year.
Recently the fund has struggled, sitting in the bottom quartile of the IA UK All Companies sector over the last three years following two consecutive bottom quartile calendar years in 2016 and 2017.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
However, during his time on the fund Thomas has delivered a total return of 410.59 per cent to 8 May 2018 compared with a gain of 265.48 per cent for the FTSE All Share index and a 258.58 per cent return from the average IA UK All Companies fund.
Below, the manager highlights three stocks he believes will be long-term beneficiaries of disruption and technological innovation within the portfolio.
Royal Dutch Shell
First up is index heavyweight oil giant Royal Dutch Shell (LON:RDSB), which is also the largest holding in the Thomas’ portfolio at 4.25 per cent.
“It may seem ironic, but our liking of Shell is not in its oil exposure, but rather its gas exposure – especially liquefied natural gas [LNG],” he said.
“Yes, it is deleveraging, making disposals, using its balance sheet more efficiently and after ceasing the issue of scrip dividends, cash dividends are now covered by free cash flow.”
Following its acquisition of BG Group in 2015, Shell has the largest position in natural gas of all European oil integrated companies, controlling 20 per cent of the global market.
Gas is the fastest growing fossil fuel globally in part because it is the cleanest and one area where demand has particularly ramped up is China.
“This is driven by the government’s focus on reducing pollution, lowering coal usage, encouraging electric vehicles and failing to overcome some structural infrastructural bottlenecks such as pipelines, refineries, terminals and storage,” Thomas said.
“I believe China will rely more heavily on gas imports in the future and HSBC predicts that China will soon overtake Japan as the largest user.”
Shell is one of the largest suppliers of gas in China with a 25 per cent market share and has signed long-term contracts with national oil majors to supply gas for the next 20 years, the manager added.
Meanwhile supply is constricting. Over the last two years, new project approvals globally have fallen 70 per cent from their historic highs, which should lead to higher prices moving forward.
“This translates to stronger free cash flow and the company upgraded guidance last November for its integrated gas division from $5bn to $8-10bn by 2020,” Thomas said.
London Stock Exchange
Up next is the London Stock Exchange (LON:LSE) – a 3.34 per cent weighting in the portfolio – which has gone through a major change to its business model over the past decade.
As such, while volatility picked up at the start of the year and bonds endured their worst January since 1992 the stock may have underperformed some people’s expectations (although it has kicked on somewhat since the end of March).
Performance of stock vs FTSE All Share over YTD
Source: FE Analytics
“The Dow Jones index enjoyed its best January since 1997 and the US dollar enjoyed its worst January since 1987. This volatility, you would have thought, might be beneficial to the London Stock Exchange,” Thomas said.
“However, the LSE has vastly changed its business model in the last ten years. In 2007 cash equities accounted for nearly 70 per cent of LSE revenues, but in 2016 it accounted for only 20 per cent of revenues.”
Instead, information, derivatives, technology and post-trade clearing have heavily diversified its revenue base, he noted.
Of course, much of this has to do with the rise of passive investing which has significantly contributed to LSE’s earnings growth through its ownership of both the FTSE and Russell indices.
Passive investment funds, such as exchange-traded funds (ETFs), need a benchmark against which to be measured and information services, like the provision of indices, now account for one-third of LSE earnings.
“Also of interest to the LSE would be merger & acquisition activity [M&A] in the UK,” the manager noted.
“In a Brexit-affected fourth quarter of 2017, the UK was ranked second to the US in terms of inbound M&A deals by value and number. In terms of outbound deals, the UK ranked fourth globally by value and second by number.”
Eddie Stobart Logistics
Last up is Eddie Stobart Logistics (LON:ESL) – the only stock of the three not in the fund’s top 10 holdings – which he brought into the portfolio at the company’s initial public offering (IPO) in April last year.
“We invested in Eddie Stobart Logistics for exposure to 26 distribution centres; 2,300 vehicles making 47,000 movements a week, oiling the wheels of ecommerce and working closely with the ‘frenemy’ Amazon,” Thomas said.
The shares to date have not performed well, down 8.55 per cent since IPO (as the below chart shows), and the manager believes this is due to the idea that the contract logistics market has historically lacked innovation and appears to be a commoditised service.
Performance of stock since IPO
Source: FE Analytics
“However, [research firm] Berenberg have done some detailed research on the stock’s model of maximising utilisation through mixing customers’ loads in vehicles, operating in complementary sectors and dynamically monitoring vehicles’ movements in real-time, which minimises empty miles,” he said.
“As a result, Eddie Stobart Logistics has market-leading vehicle utilisation rates of 86 per cent, compared to an industry average of 71 per cent.”
Meanwhile, industry-leading margins of 7.5 per cent compared to an average 4.9 per cent are explained by ESL’s scale, high vehicle utilisation rates, diversified customer services and cost increase pass-throughs.
Not helping its image is the green liveried lorries on the roads which suggests the company is a road haulage firm and little more, said the manager.
“While this remains a substantial part of the business, it has expanded into related businesses such as warehousing, supply-chain consulting and ecommerce services, including multi-channel order fulfilment, returns processing and stock clearance,” Thomas noted.