Economic subjects | Finance » The Thomas Report

Source: http://www.doksinet May 2018 Equities Insights The Thomas Report to the Global Cities Institute, Kinshasa, in the Democratic Republic of Congo, has surpassed Paris as the largest Frenchspeaking city in the world. Nigel Thomas Fund Manager of the AXA Framlington UK Select Opportunities Fund The word ‘disruption’ is perhaps overused when it comes to the adoption of the digital economy, but change is happening faster than you think. At a February presentation from Rio Tinto’s Chief Executive Officer, Jean-Sébastien Jacques, we learnt that half of the truck fleet working in Rio Tinto mines drive themselves and in three years it will be 100%. It is not just in terms of technical innovation that change is prevalent; we are seeing it in demographics. According In our own economy, high street retailers are forced to cope with the growth of online retailing. Restaurants are adapting to Deliveroo, Just Eat and Uber Eats, while hotels are contending with AirBnB. And over the

next decade we do not know what will be propelling cars, who will be driving them or who will own them. Software has morphed into the ‘Cloud’, photography into the smartphone (along with your torch and alarm clock), television to streaming and published advertising to online platforms. Any corporate activity, or business making a decent margin, is ultimately a target or opportunity for Amazon. Research earlier this year from stockbrokers Peel Hunt made the case that blockchain technology could disrupt disruptors such as Uber. According to the research, it is possible that disintermediation could threaten Uber’s It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. Charles Darwin Source: http://www.doksinet Equities Insights: The Thomas Report growing strongly. 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. I believe China will rely more heavily on LNG imports in the future and HSBC predicts that China will soon overtake Japan as the largest user. RDS is one of the largest suppliers of LNG in China with a 25% market share. Over the last two years, new LNG project approvals globally have declined 70% from historic levels (Source: HSBC). This will ultimately lead to firmer pricing as demand grows. This extra demand is not only confined to China but to Asia as a whole. Within China, RDS has established strong relationships with Chinese companies, having signed long-term contracts with national oil majors to supply LNG for the next 20 years. This translates to stronger free cash flow and the company upgraded guidance last November for its Integrated Gas division from US$5 billion to US$8-10 billion by 2020. business model: “users submit a request to Uber, Uber sends back their location to the

nearest cars and notifies the drivers that a job is waiting. Once that trip is complete, the user pays Uber and Uber sorts out returning that money to the drivers, taking a cut in the meantime. In blockchain Uber, a user would submit a request to the connected ecosystem, and all parties would instantly be made aware and a driver would then be able to connect themselves directly. Once the transaction is complete, it would be verified and then the user’s account would be charged and the rightful driver would receive the money – all protected by the encrypted nature of blockchain.” As technology progresses through to audio assistants (think Alexa) and augmented reality, so artificial intelligence (AI) and big data will drive the growth of the new economy. We mentioned in our last report we had invested in Eddie Stobart Logistics (ESL) 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. As investment managers we not only monitor and adapt to change, but scrutinise company management teams to see if they are doing the same. “The amateurs discuss tactics; the professionals discuss logistics” Napoléon Bonaparte The shares to date have not performed, probably because many believe that the contract logistics market has historically lacked innovation and appears to be a commoditised service. However, Berenberg have done some detailed research on ESL’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. As a result, ESL has marketleading vehicle utilisation rates of 86%, compared to an industry average of 71%. Also, many look at the green liveried lorries on the roads and conclude it is a road haulage company. 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. Cost inflation is perceived to be a major risk to the business, i.e does the company have the ability to pass through rising costs? ESL’s client contracts are structured in a way that fuel is a passthrough cost to the customer. Their contracts also have a range of other variables where potential cost inflation is accounted for, such as legislative changes and the like. Industry-leading margins of 7.5% compared to an average 49% are explained by ESL’s scale, high vehicle utilisation rates, diversified customer services and cost increase pass-throughs. RDS is somewhat connected to the global debate on plastic packaging, being a fully-integrated oil company with large downstream assets (i.e consumer products derived from crude oil or natural gas). This debate has also led to the market reappraising one of our other holdings

– RPC Group, which is a UK listed Pan-European, plastic packaging company. Think making plastic ketchup bottles for Heinz. David Attenborough’s last episode of Blue Planet nearly crashed the internet in China as 100 million tried to download it. These three observations (well sourced) is all we will add to the debate: 1) 80% of the plastic found in the ocean is estimated to have come from land-based sources. The remaining 20% is thought to be the result of water-related activities. (Source: European Commission – Our Oceans, Seas and Coasts.) 2) Current research indicates that the largest source of leakage of plastic items into the ocean is from a small number of Asian and Pacific Rim countries which account for more than 80% of ocean waste (Source: Jambeck et al Plastic Waste inputs from land into ocean; Marine Pollution.) The largest holding in the AXA Framlington UK Select Opportunities Fund is Royal Dutch Shell (RDS). It may seem ironic, but our liking of RDS is not in its

oil exposure, but rather its gas exposure – especially liquefied natural gas (LNG). 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. Of the European oil integrated companies, and following the 2015 acquisition of BG Group, RDS has the largest position in LNG, controlling 20% of the global market. Gas is the fastest growing fossil fuel globally, and the cleanest. In China, demand for natural gas is 3) 98% of the litter in our oceans emanates from countries outside Europe and the United States. (Source: Ellen MacArthur Foundation, The New Plastics Economy: Rethinking the future of Plastics.) Bamboo straws for your cocktails in the West End of London soon in every bar! 2 Source: http://www.doksinet ETFs, need a benchmark against which to be measured – FTSE and Russell indices for example. Information services, like the provision of indices, now

account for one third of LSE earnings (Source: Berenberg). “The big money is not in the buying or the selling, but in the waiting” Charlie Munger, Vice Chairman Berkshire Hathaways Just as the lack of volatility in financial markets became the new paradigm, events at the beginning of 2018 proved otherwise. Bonds endured their worst January since 1992 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 one of our top ten holdings in the Fund – London Stock Exchange (LSE). However, the LSE has vastly changed its business model in the last ten years. In 2007 cash equities accounted for nearly 70% of LSE revenues, but in 2016 it accounted for only 20% of revenues. Information, derivatives, technology and post-trade clearing have heavily diversified its revenue base (Source: Berenberg). Indeed, the rise of passive investing has significantly contributed to

LSE’s earnings growth through its ownership of FTSE and Russell indices. This is because these passive investment funds, such as Also of interest to the LSE would be merger and acquisition activity (M&A) in the UK. 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. (Source: Allen & Overy, data provided by Thomson Reuters). We have persistently stressed that ‘things will not necessarily get better or worse, but will become different.’ The state of change within corporations is evidenced above through LSE, RDS, ESL and Rio Tinto. 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. Discrete performance over 12 month periods to latest quarter end (%) 31/03/13 to 31/03/14 31/03/14 to 31/03/15 31/03/15 to 31/03/16

31/03/16 to 31/03/17 31/03/17 to 31/03/18 AXA Framlington UK Select Opportunities Fund R GBP 15.63 4.62 -1.47 8.80 2.16 FTSE All-Share 8.81 6.57 -3.92 21.95 1.25 Source: AXA Investment Managers as at 31/03/2018. Basis: R Inc share class, Net of Fees, Net income reinvested in GBP, Single price NAV as from 15/09/14, prior to this dual pricing basis (bid to bid). To ensure consistent performance figures between bid and NAV prices, an adjustment factor has been applied Past performance is not a guide to future performance. Top ten holdings as at 31 March 2018 Company Sector Royal Dutch Shell Plc Oil & Gas Producers 4.24 Elementis plc Chemicals 3.60 Prudential plc Life Insurance 3.47 Ashtead Group plc Support Services 3.39 London Stock Exchange Group plc Financial Services 3.36 BTG plc Pharmaceuticals & Biotechnology 3.32 BBA Aviation plc Industrial Transportation 3.31 RPC Group Plc General Industries 2.88 Rotork plc Industrial Engineering

2.87 Breedon Group plc Construction & Materials Total % 2.83 33.27 Total number of holdings 62 Source: AXA Investment Managers. Past performance is not a guide to current or future performance. Investments involve risks, including the loss of capital The capital of the Fund is not guaranteed. The value of investments, and the income from them, may go down as well as up and you may not receive back the full amount invested. 3 Source: http://www.doksinet AXA Framlington UK Select Opportunities Fund Risk and reward profile Lower risk Higher risk Potentially lower reward 1 2 Potentially higher reward 3 4 5 6 7 The risk category is calculated using historical performance data and may not be a reliable indicator of the Fund’s future risk profile. The risk category shown is not guaranteed and may shift over time. The lowest category does not mean risk free. Why is this Fund in this category? The capital of the Fund is not guaranteed. The Fund is invested in

financial markets and uses techniques and instruments which are subject to some level of variation which may result in gains or losses. Additional Risks Liquidity Risk: some investments may trade infrequently and in small volumes. As a result the Fund manager may not be able to sell at a preferred time or volume or at a price close to the last quoted valuation. The Fund manager may be forced to sell a number of such investments as a result of a large redemption of units in the Fund. Depending on market conditions, this could lead to a significant drop in the Fund’s value and in extreme circumstances lead the Fund to be unable to meet its redemptions. Further explanation of the risks associated with an investment in this Fund can be found in the prospectus. Important Information Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document, which provide full product details including investment charges and risks. The

information contained herein is not a substitute for those documents If you are unsure about any of the information provided please speak to a financial advisor. If you do not have an adviser you can find one at wwwunbiasedcouk The source of all information in this document is as at 31 March 2018, unless stated otherwise. This document does not constitute an offer to buy or sell any AXA Investment Managers group of companies’ (‘the Group’) product or service and should not be regarded as a solicitation, invitation or recommendation to enter into any investment transaction or any other form of planning. It is provided to you for information purposes only The views expressed do not constitute investment advice, do not necessarily represent the views of any company within the Group and may be subject to change without notice. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy,

reliability or completeness of the information contained herein. Past performance is not a guide to future performance The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Due to this, an investment is not usually suitable as a short term holding Framlington Equities is an expertise of AXA Investment Managers UK Limited. Issued by AXA Investment Managers UK Limited which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068 Registered Office: 7 Newgate Street, London EC1A 7NX Telephone calls may be recorded for quality assurance purposes. Design & Production : Internal Design Agency (IDA) | 05/2018 | 21284 | Produced using stock that is FSC certified. AXA INVESTMENT MANAGERS This communication is issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK.

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