The £4bn AXA Framlington UK Select Opportunities fund is positioned to benefit from China’s slowing growth and uncertainty over the future of the world’s second largest economy, according to its star manager Nigel Thomas (pictured). 
This year has been turbulent for equities to say the least, with a dangerous combination of slower growth, oversupply in various areas of the market and the devaluation of the renminbi in the world’s second-largest economy unnerving investors.
This, combined with other global headwinds, such as the uncertainty surrounding the impending rate hike from the Federal Reserve, has led to huge waves of volatility in the market year-to-date, including August’s ‘Black Monday’ when markets across the globe simultaneously plummeted.
Performance of indices in 2015
Source: FE Analytics
Investors shouldn’t be pulling their money out of the market any time soon though, according to Thomas, whose fund has quadrupled the performance of the FTSE All Share index since the start of the year.
He believes that the situation in China was never going to end well due to its excess investment leaving the supply and demand balance off-kilter, but many UK companies can reap the rewards from this changing dynamic.
Thomas says one of the reasons to be positive is that the economy is shifting from a dependence on heavy industry towards consumption. According to data from UBS, the services sector accounted for 38 per cent of the country’s GDP in 2010. Just four years later, this had risen to 50 per cent of GDP.
“Changing from a fixed asset investment economy to a consumption and services one will take time, especially as the savings ratio in China is so high, predicated by the need of the population to save to pay for health services and education of their children. Until the social security safety nets are in place, this is going to be a long, drawn out process,” Thomas (pictured) said.
Because of this, he believes that it’s short-sighted to be focusing on factors such as electricity demand, bank loans and rail cargo volumes when assessing the health of China’s economy, and that the fall in commodities and oil prices have actually benefitted certain stocks in his portfolio.
One of these companies is RPC Group PLC, which is currently the seventh-largest holding in his AXA Framlington UK Select Opps fund. The UK-based business is one of Europe’s largest suppliers of plastic packaging, and is a constituent of the FTSE 250 index.
“Almost 70 per cent of their revenues are from food manufacturers and consumer goods companies and they have been growing in new markets such as coffee capsules, cosmetics and pharmaceuticals,” Thomas explained.
“Plastic has been gaining market share from metal and glass globally – you don’t buy many large tins of paint anymore; they are in plastic pails. RPC has faster organic growth than traditional paper/glass/metal based peers and, because of its size, they can now enjoy a polymer raw material cost advantage, especially as 40 per cent of RPC’s operating costs are polymer raw material.”
Since the start of the year, RPC has returned 37.22 per cent, outperforming its index by 28.45 percentage points. It has also made three acquisitions this year alone, and to date has 91 factories in more than 24 countries.
Performance of stock vs index in 2015
Source: FE Analytics
“With the benefit to come from lower input costs, especially oil-based polymer, and with organic growth and through acquired businesses, the outlook for RPC looks good,” Thomas added.
Another way that Thomas has found comfort in today’s volatile market is through M&A, a prime example being the fund’s second-largest holding Betfair.
The betting giant agreed on a £5bn merger with Paddy Power in August this year, which will make the company one of the world’s largest online gambling businesses.
It has also been best-performing stock in the fund’s portfolio over the last 12 months, returning 162.04 per cent compared to its FTSE 250 index’s return of 12.29 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
“The logic behind the merger is primarily scale. Although Betfair has no betting shops and is the largest betting exchange in the world, the combined group will grow in the betting industry through having many routes to market – the omnichannel model,” Thomas said.
The third way that the manager is deflecting the negative impact of China on markets is to turn to UK mid-caps, as they are more domestically-focused and are more likely to grow their dividends.
According to AXA, the UK has one of the highest company pay-out ratios in the world at 76.7 per cent, compared to the global average of 51 per cent.
The area of the UK market that has had the most significant dividend increases recently is the FTSE 250 index – the FTSE 100 index’s dividend growth was up 8.6 per cent in this years’ second quarter, while the mid-cap index’s pay-out increased by 26.1 per cent.
“Total shareholder returns are something we always look for in a company, weighted against the equity risk. If all companies behaved like VW for example, then those risks would not be worth taking. Happily they all do not,” Thomas continued.
“Over the long term we can invest in good companies that grow their earnings, cash flow and dividends. VW’s actions pander to the siren voices of the newly awakened socialists in the UK. Let us not forget the sage words of John Marshall, the 19th century US Supreme Court Judge: “The power to tax involves the power to destroy”.”
Over the manager’s 13-year tenure, AXA Framlington UK Select Opportunities has returned 312.21 per cent, outperforming its peer average in the IA UK All Companies sector by 138.27 per cent.
Performance of fund vs sector over management tenure
Source: FE Analytics
The fund is also in the top decile for its maximum drawdown and its alpha ratio, which measures performance in excess of its benchmark, over the same time period.
AXA Framlington UK Select Opportunities has a clean ongoing charges figure of 0.83 per cent and yields 2.09 per cent.