Disruptive companies versus legacy businesses is the most important division in the UK stock market, according to Colin McLean at SVM Asset Management.
A lot has been made by UK-focused fund managers about the fact that 75% of the FTSE 100, and around half the FTSE 250, derive earnings and pay dividends in currencies other than pound sterling.
Investing in these, they claim, should be rewarded as sterling continues to sell-off against other prominent currencies like the US dollar and the euro. But McLean says this division is much less important than the impact of disruptors.
Conversely, the US bull market in the year-to-date has been led by the original ‘tech disruptor’ names; the FAANGs. And McLean, who runs the SVM UK Growth fund alongside Margaret Lawson, thinks it will be more positive for returns to look at UK disruptors such as online retailer ASOS (ASC), which continue to grow at faster levels.
“The calls at the top end of the market – the BPs and Shells – are very much about commodities and macro events,” McLean tells Morningstar.co.uk. “Those are drivers I don’t think anyone can really guess that well.
“Those global companies catch more of the disinflation globally, more of the Trump stuff and everything else. As soon as you get away from those big generic macro stocks at the top, then you can start to stock pick.”
Further, McLean adds, those companies at the top of the FTSE 100 reflect past success. “That’s why they got there and full marks for BP (BP.) for lasting centuries, but it reflects an environment we’ve had in the past.
“We’re trying to find companies that are much better attuned to the environment we’re facing today. Companies that are exploiting the today’s opportunities much better – such as changing tastes, particularly of younger people.”
Not Just Retail Stocks
Key to the disruptors’ success has been the rise of online shopping. While select names on the high-street survive, many have hit hard times; Debenhams, Mothercare, House of Fraser and more.
Looking at the firms on the other side of that trend, such as ASOS, has proven fruitful. McLean thinks there’s great scope for further growth, with online retailing still only accounting for around a tenth of purchases in Europe.
But there are plenty of other areas being upset by disruptors. McLean likes airlines, despite the headwind that a rising oil price brings them. Low-cost carriers Ryanair (RYA), easyJet (EZJ) and the lesser-known Central and Eastern Europe-focused Wizz Air (WIZZ) are held in the portfolio.
While higher oil prices have an obvious negative impact for this trio, it has worked to their advantage in other ways, notably helping to “kill off Monarch” and other competitors.
Elsewhere, airports are moving more towards on-site retailing models where part of the rent paid by operators is linked to the amount of goods they sell. This means airports are keen to increase footfall.
“Before, Ryanair would have flown you to a place in the back of beyond and you’d spend two hours trying to get to the middle of Rome, or wherever,” explains McLean. “But now they are getting slots in the main airports.”
McLean sees opportunities from the emergence of sites such as Booking.com and Airbnb, which have started to diversify their offering to include hotels, car rental, and insurance.
“They’ve got a lot of customer data that they can leverage to become more of a platform for travel and up sell all their services,” McLean adds.
“That technology is not changing the way they fly, but it’s changing the business proposition that someone like Wizz or Ryanair has.”
As proven by WH Smith (SMWH), travel retail is a fast-growing area. The high-street stalwart is now a staple at many airports worldwide, but it also has a big presence at motorway service stations up and down the UK.
McLean’s play on this travel retail is Applegreen (APGN), an AIM-listed petrol forecourt operator in Ireland, the UK and the US. The firm recently announced the purchase of a majority share in Welcome Break, which has a portfolio of 24 motorway service areas as well as 29 hotels.
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