Income investors should own companies that embrace and enable technological disruption if they want to adapt in this increasingly disrupted business environment, according to Neptune’s George Boyd-Bowman.
Boyd-Bowman, who has overseen Neptune US Income since 2016, said the current landscape characterised by a faster-than-ever technology penetration and adoption is posing many challenges to income investors.
The first challenge, he said, is that many of these disruptors don’t pay a dividend, which automatically eliminates them from the income equation. 
“The obvious place to start is by looking at the disruptive companies and those harnessing social media as maybe we can invest in those. These are your Googles, Facebooks or Amazons or, in the case of China, your Tencents and your Alibabas,” he said.
“These are the so-called network technology companies that, as users get added to their platform, become more and more valuable over time.
“But there are two problems for income investors: the fundamental one is that they don’t pay yield so we can’t invest in those.”
The second crucial point, Boyd-Bowman continued, is that many of these attractive companies – including pioneers of the gig economy such as Uber or Airbnb – don’t tend to be publicly listed.
“When we look at the market, you have the dividend aristocrats, which are those companies that have grown their dividends for 25 years in a row,” he explained.
“However, what you see is that not many technology companies have done that over the last 25 years.
“And the vast majority of these aristocrats sit in the consumer staples sector but this is not sustainable.”
According to Boyd-Bowman, while big consumer brands used to be well placed as income payers, this is no longer the case.
“Some 40 years ago it was the big brands that would eat up anything in that space; it was their game but no one else’s. But if you fast forward to today it’s a complete reversal.
“The crucial point here is, because of the digital disruption that this is happening, the digital-empowered newcomers are nibbling away all these big consumer brands.”
He continued: “The old model was about big brands from the 1960s to mid 2000s. You then had big production, big media and therefore big brands. These companies had a scale benefit: they could tell Walmart what stock they wanted on the shelves and they had a better supply chain.”
This, Boyd-Bowman noted, gave these businesses better economics and allowed them to spend more than anyone else on advertising.
Today, because of the digital disruption, it is no longer about mass production and both the value chain and the supply chain are being de-constructed, he said.
Not only can brands go directly to consumers but media isn’t a fixed cost anymore, as digital newcomers can communicate with consumers through digital marketing and deliver successful campaigns at a lower cost.
Consumers are also changing, as they no longer trust brands but other peers and learn about products on social media, noted the Neptune manager.
An example of this disruption can be seen in the tobacco sector, where traditional companies can’t play the game of overcoming falling volumes with increasing prices anymore and have to bet on the next generational products.
E-cigarette use among US youth
Source: US Department of Health and Human Services
“You see it in the US with Juul Labs, an electronic cigarette company, which has 70 per cent market share in the US,” he noted.
“Juul is so popular among US high school students that the FDA [Food and Drug Administration] has called their cigarettes an epidemic.”
According to Boyd-Bowman, the famous producer and marketer of tobacco, cigarettes and related products Altria (previously Philip Morris) is a “melting ice cube” and is more likely to cut its dividend over the next five years than it is to keep growing it.
He added: “General Mills – the manufacturer and marketer of branded consumer products including Cheerios, Häagen-Dazs or Yoplait – is another example of company that is more likely to cut its dividend than to grow it.
“They have two problems: firstly all of their categories are being nibbled by these digital direct-to-consumer companies.
“Secondly, they are in the wrong part of the store. They tend to be in the middle and, when you look at the numbers, there is a little bit of growth in some of the categories of the outside of the supermarket but unit sales are falling in the middle [dry groceries and frozen food].
“The reasons behind that include health, wellness, etc, but it all adds up to a miserable picture for some of these packaged food companies in the centre isle of supermarkets,” he explained.
Given that big brands are being nibbled away by those digitally empowered brands, Boyd-Bowman said income investors should own the enablers and embracers of disruption.
Two examples are American supplier of programmable logic devices Xilinx, which is making the chips that go into the 5G devices, and James River Insurance, which insures four out of five Uber drivers in America.
“With Xilinx the key point is that you need five times more chips in a 5G device than in a 4G one, which sounds good for a company that already has a good yield and we think will continue to grow over the next three to five years,” he concluded.
“We like James River because, with the gig economy, Uber drivers no longer want an annual insurance. They want to be insured per mile, which most of insurers won’t do, but these guys have a speciality in unusual risks.
“They’ve also doubled their premium over the last three to four years and their average loss ratio over the last 10 years is 10 points better than the industry.”
Performance of fund v sector and index under Boyd-Bowman
Source: FE Analytics
Under Boyd-Bowman, Neptune US Income has delivered a 23.74 per cent total return compared with a gain of 26.45 per cent for the average fund in the IA North America sector and a 30.64 per cent gain for the S&P 500 index. The fund yields 2.66 per cent and has an OCF of 0.99 per cent.