The importance of investing in companies that have successfully embraced technology is growing, but careful stock selection is imperative as many of the easy stock market gains are likely to have passed, says Trevor Green, Manager of the Aviva Investors UK Opportunities Fund.

January 2014

Key points

  • Trading likely to be volatile as markets try to gauge how central banks react to improving economic backdrop.
  • With inflation under control we do not expect UK interest rates to rise this year.
  • UK equities look cheap relative to US and Europe.
  • Focus on companies that have successfully embraced technology plus those that changed management in 2013.

Following a stellar performance in 2013, we anticipate another positive year for stocks due to the improving economic outlook, low interest rates and un-stretched valuations

Nonetheless, shares arguably aren't the steal they were last year.

Also, volatility could ratchet up as the markets try to gauge how central banks will react to the improving global economy.

This is an environment, which favours successful stock pickers.

Turning to the investment outlook, UK equities look cheap compared with their US and European peers. Whereas the US and European markets are trading on a multiple of 19x historic (trailing) earnings, which is above their long-run average, the UK trades on a below-average multiple of 15.1

While we do not believe all UK shares are cheap, there are some key themes underlying our investment approach which we believe should enable us to deliver above-average returns for our investors in the coming year.

Sustaining versus disruptive technologies

One important investment theme concerns the impact new technologies are having on companies. I believe technology can be classified as having ‘sustaining’ and ‘disruptive’ elements – terms coined by Harvard Business School professor Clayton M Christensen in his book The Innovator’s Dilemma.

By sustaining I am referring to when corporations invest to improve existing services and products. Quite often this is about defending market share. Disruptive technology, by contrast, disturbs the status quo and transforms the way business is done.

How has this view influenced our investment approach? Foxtons, the London-based estate agent, is one company held in the Aviva Investors UK Opportunities Fund which I manage. It has strengthened its position hugely having invested in technology to develop an award-winning website. Easyjet is another. It has been one of the leaders of the low-cost airline industry helped by a sophisticated online booking system.

Reinventing buying services

Examples of other companies in the fund that are likely to benefit from disruptive technology include Blur Group, an online business-to-business services company and Moneysupermarket.com, the price comparison website group. Blur Group is reinventing how businesses buy core services with its platform.

Meanwhile, Moneysupermarket.com, the market leader, is making consumers more informed when selecting their car insurer or energy supplier. Revenues continue to grow as consumers become more comfortable buying online. Importantly, both companies have successful models. The bottom line is that from an investor’s perspective the importance of selecting companies that have successfully embraced technology will only gain in importance.

Cashing in on discretionary spending

The UK Opportunities Fund is also overweight a diverse list of companies whose revenues are generated by discretionary consumer spending. These include: Berkeley Group, the luxury house builder focused on south east England which has a superb track record of delivering shareholder value. Foxtons Group and buy-to-let lender Paragon Group are exposed to the buoyant housing market. Other holdings include Vertu Motors, a car-dealership based in north east England; and Restaurant Group, which owns family-friendly restaurant chains such as Garfunkel’s and Frankie & Benny’s.

Banking on new management

I am also excited by several companies that changed their management in 2013. Examples include N Brown, the plus-size apparel retailer. It appointed a new chief executive, Angela Spindler, last July and she has already made a positive impact. Shire, the speciality pharmaceutical company, is another. Its new chief executive has changed the focus of the company’s drug pipeline and reduced its cost base.

In my view, other investments which could have positive tailwinds irrespective of the mood of the stock market include ITV. It is likely to get an advertising windfall from the football World Cup. The London Stock Exchange has an opportunity to grow revenue and cut costs following its recent acquisition of the clearing house LCH. There’s Blinkx, a company which is to video search what Google is to text search. It looks set to steal a march on its competitors following its recent acquisition of a mobile-ad network company.

Emphasis on being selective

To summarise, I believe 2014 looks positive for UK equities on a selective basis. As I have highlighted above I aim to keep the fund focused on companies with proven business models and those which have specific exciting opportunities.

 

1. Source: Citi Research Global Equity Road Ahead 7 January 2014

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