Technological disruption offers both threats and opportunities and although retailers are enduring short-term input cost inflation as a result of the fall in the value of sterling, they are reacting via the adoption of technology.
Dunelm, for example, is using driverless forklift trucks to relocate pallets from the ‘goods in’ area to the warehouse racks – they work 24-hours a day, are never ill and are not susceptible to increasing wages.
On The Beach is capitalising on the growth of online dynamically packaged holidays. The internet, via both mobile and desktop, is being used increasingly to book holidays abroad. In addition, On The Beach has no physical stores, owns no aeroplanes, does not take stock risk on hotel rooms and as a result has an incrementally lower cost, lower risk model than the traditional travel agents. As with many other companies that use the internet as a means of distribution, the barriers to entry are low, but the barriers to success are high and as market share builds, so does a ‘defensive moat’.
Evolving economy
Technological advancement is also increasing asset utilisation. AirBnB, Uber, Cloud Computing, Zipcar offer the ability to rent assets on a flexible, short-term basis with a reducing need to own. This increases utilisation of resources and therefore reduces the requirement for such a large asset pool to offer the same total amount of usable capacity.
Dechra pharmaceuticals is another example. This company develops, markets and sells principally to the small animal market and is benefiting from the increased incidence of pet ownership globally, together with a rising propensity to spend on the welfare of domestic pets. Dechra also develops novel products for the large animal market and has shown success with products such as Osphos, used to treat Navicular Syndrome in horses.
When investing in UK equities, we constantly question how our investments will be impacted, both positively and negatively by these forces, for example, Clinigen is benefiting from the growing need to keep counterfeit drugs out of the global supply chain; as stock pickers, we can allocate capital to the beneficiaries of these forces and let the index money allocate to those areas of secular decline.
We remain confident that actively investing in UK-listed companies that are compounding their earnings and dividends – where corporate governance is world leading, where contract law and title law are dependable and where company management teams are permanently accessible – will continue to be a rewarding strategy.
Chris St John is manager of the Axa Framlington UK Mid Cap fund
