Nigel Thomas has brought down the curtain on his 40-year career by paying tribute to a holding that has adapted successfully to the modern world.
Thomas, who next March will retire from AXA Investment Managers and his long-running position at the head of the UK Select Opportunities fund, has seen plenty of change during his career. In the final edition of his widely followed Thomas Report, he said that with his 64th birthday soon approaching, it was good time to retire.
‘There have been many changes to this industry since I started, just before Maggie Thatcher was elected in 1979,’ Thomas wrote.
‘The removal of exchange controls was probably one of the first notable events, soon followed by the de-nationalisation of the myriad state owned companies and the general reduction of taxes – personal and corporate.
‘You never stop learning in this industry, whether through the gloom of the crash of 1987 or the credit crunch of 2007-2008, or the euphoria of the tech bubble in 1999-2000.
Those who have stuck with Thomas have been handsomely rewarded with an 5,710% return since the start of 1987, smashing the FTSE All Share return of 1,378% (see below).
Source: Lipper, Citywire Discovery & Citywire Investment Research / Time period 31 years 9 months.
Performance in GBP. Total returns calculated gross of tax, ignoring the effect of initial charges and with income reinvested veroex-dividend date
The rise in the power of data is a major trend Thomas has had to navigate in recent years. He believes ‘data capitalism’ is still very much in its early days.
‘The new rules of data capitalism are still being written. Jeff Bezos, (founder and chief executive of Amazon), believes you must obsess about customers, invest for the long term, exploit your network of customers to grow further, and focus on delivering the best customer experience at the lowest price via an online platform.’
He warns that where data capitalism has been embraced, such as the UK, traditional companies have to adapt or face obsolescence. ‘It is one of the functions of the investment manager to establish which they are, and avoid the dinosaurs,’ he says.
Thomas notes that the long list of companies which have been in administration or company voluntary arrangements, including Homebase, Mothercare, House of Fraser, Toys R US and Carpetright, suggest the Amazon effect is taking its toll.
Digital disruption is not restricted to retailing and can be found in the automobile, property, travel and hotel accommodation sectors, Thomas points out.
It took Airbnb three years to enter 89 countries, versus 72 years the Hilton Group took to enter 69 countries, he says in illustration.
Thomas highlighted research from Citigroup estimating that the lifespan of the average S&P 500 company has dropped from 61 years to 18 years.
One company he has increased exposure to on the basis that is coping well with change is Coats Group, which dates back to the 18th century.
‘Established in the 1750s by James and Patrick Clark in Paisley, Scotland, it became a listed company in 1890. It was one of the world’s largest companies by market capitalisation in 1912, following its merger with the Coats family company. Through decline, de-listing and rebirth via private equity, it re-listed on the London Stock Exchange in 2015.’
The firm has evolved into a leading industrial thread manufacturer with a 20% market share, with Uniqlo, Nike, Adidas, Under Armour, Next and GAP all among its customers.
‘More than 20% of performance material sales come from new products, developed in three innovation centres, increasingly interacting with start-up companies and universities.
‘[It has] put in programmes to reduce energy and water and invest in more efficient equipment, which has led to a 26% decline in water usage and a 20% decline in energy over five years. In 2017, 29% of energy used was from renewable sources; for example, solar, while 75% of waste is reused or recycled.’
Thomas says where firms struggle to enable these types of strategies, more radical solutions are needed, with de-mergers one of his particular favourites.
One the most successful demergers in his career dates back to 1993, when ICI split its business into six distinct parts. A quarter century on and Prudential, which is spinning off its investment engine M&G, is another holding going through a similar process. ‘Upon completion, there will be two listed companies with different investment characteristics and opportunities,’ he says.
This year has been among the toughest years in Thomas’ career with M&A activity in some of holdings such as GKN, failing to prevent a loss of 6.1% in the 12 months to the end of October versus an average loss of 3.7% in the peer group.
But this has not left Thomas doubting his approach. ‘We continue to advocate our investment mantra that things will not necessarily get better or worse, but will become different... it is at the core of our investment style, but can be blown off course in the short term by global events in the interest rate and business cycle.’
‘I know that I leave the AXA Framlington UK Select Opportunities fund in very capable hands, with long-standing deputy manager, Chris St John, taking over full management responsibility in January 2019.’