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Disruptive shares that could make you rich
Certain fund managers, including Neil Woodford and James Anderson, buy ‘disruptive shares’ – we outline those that are wreaking havoc on traditional business models
What happens when new technology revolutionises a market, transforming the way consumers use – and pay for – goods and services? Some established firms can evolve fast enough to survive the transition. Others, however, fade away and die, their place usurped by the new “disrupters”, who can garner huge profits from cheaper, more popular ways of meeting consumers’ needs.
Spotting such disrupters, and the likely impact they could have on established businesses, is crucial for investors.
Russ Mould, of AJ Bell, the broker, said: “History shows that firms which make extremely fat profits don’t tend to do so for too long. Few companies manage to reinvent themselves – America’s Apple and IBM are rare exceptions – and in these cases investors are often better off siding with the new disruptive force rather than with the old guard. Just ask Nokia shareholders for details.”
Below, we identify four industries that are under attack by disrupters and name the shares some of Britain’s most respected fund managers are backing to play the trend.
Online retailers and discounters
The biggest online retailer, Amazon, has revolutionised the way consumers shop and is widely held by specialist technology funds and global growth funds.
James Anderson, of the Scottish Mortgage Investment Trust, is one notable buyer who has held the shares for several years.
Mr Anderson also holds a less familiar share in Flipkart, an Indian e-commerce company founded by two former Amazon executives. “It has aspirations of replicating Amazon in the emerging markets and is a company that I think will multiply its value several times over,” Mr Anderson said.
Supermarket firms, including Tesco and Sainsbury’s, have felt the heat from the rise of online retailers. Another disrupter in recent years – discounters – has added to the pain.
But Aldi and Lidl, which have aggressively cut prices and attracted customers away from the supermarket giants, are private companies and not listed on a stock market.
Other discounters are listed, however. Guy Anderson, co-manager of Mercantile Investment Trust, holds B&M European Value Retail, a discount chain that operates in Britain and Germany.
Another discounter is Poundland, which is held by Nigel Thomas, who runs the AXA Framlington UK Select Opportunities fund. Mr Thomas said he expected the shares to benefit from shoppers changing their buying habits – and growing numbers of middle-class customers. Half of the firm’s customers were already “middle class”, he said, and likely to spend more money at the stores.
Challenger banks and peer-to-peer lenders
Banks divide fund managers. Some will not touch the shares on principle, worried about the opacity of banks’ loan books and remembering only too painfully the losses of the financial crisis.
But another, equally fervent camp of fund managers now favours the sector, arguing that banks have got their act together and have become much safer thanks to tighter internal controls and regulation.
Another approach is to avoid “dinosaur” banks and, instead, buy into the emerging, “challenger” firms that are stealing business from traditional high street banks and offering new, rival services enabled by technology.
Neil Woodford, regarded as one of Britain’s best investors, is playing this trend, buying challenger banks and peer-to-peer firms instead of shares in old-fashioned banks.
Mr Woodford holds Durham-based challenger bank Atom and RateSetter, the UK’s largest peer-to-peer lending platform. Peer-to-peer, or “P2P”, involves internet platforms that directly link borrowers with investors, cutting out the banks and potentially offering both parties better deals.
Mr Woodford is a notorious “bank bear”. He avoided the sector before purchasing HSBC in 2013. He sold a year later, citing the risk of “unquantifiable” fines from regulators.
Mr Woodford also owns P2P Global Investments, an investment trust offering savers a ready-made portfolio of peer-to-peer loans. Other well-known professional investors, including Gary Potter and Rob Burdett, of F&C, and George Luckraft, of Axa Investment Managers, also own shares in this trust.
LendingClub, the American challenger bank, is another that is favoured by respected fund managers.
It is held by Mr Anderson, who said: “Banks face huge threats from new entrants armed with superior technology to capitalise on the different ways consumers are now saving.”
Other challengers include Secure Trust Bank, Aldermore and Shawbrook, all of which are quoted in London.
3D printing
The 3D printing revolution has the potential to disrupt numerous industries.
According to Darius McDermott, of Chelsea Financial Services, the broker, one of the UK’s leading pioneers in this field is GKN. Electronics distributor Premier Farnell, which distributes 3D printers across the world, is another holding that could benefit.
The disruptive effect would be to “reduce the underlying volume of machining of components”, Mr McDermott said.
However, one of the world’s largest 3D printing firms, 3D Systems, listed in the United States, has had a rocky ride since it made its stock market debut in May 2011, highlighting the volatility investors should expect with “disrupters”.
Its share price rose from $13 to hit a peak of $96 at the start of 2014. At this level it was trading on a price to earnings (p/e) ratio of over 50. This was too rich for many investors, who offloaded their holdings. Today the shares trade at $20.
Robotics and electric cars
Fictional robots and plastic toys have made a lot of money for George Lucas, the man behind the Star Wars films, but can investors profit from the real thing?
One fund that is hoping to profit is the passively run exchange-traded fund (ETF) or tracker Robo Stox Global Robotics and Automation ETF from ETF Securities. It is designed to track an index of 79 Robotics companies from 15 countries, including Renishaw and E2V Technologies of the UK. It costs 0.95pc a year.
It is important to note that the ETF uses synthetic replication – derivative agreements – to generate the performance of the underlying index and does not actually hold the stocks themselves. This can leave investors exposed if the financial institutions backing these derivatives run into difficulties.
Jim Mellon, the respected investor and author of Fast Forward and Cracking the Code, has cited robotics and automated transport as especially promising areas in terms of technological innovation.
Shares that could benefit from the latter include Tesla, the electric car maker whose shares are quoted on Nasdaq, which builds luxury and sports vehicles. It also sells batteries to other motor manufacturers, including Toyota.