Companies that are currently corner stones of the US equity index will shrink in the coming decades as technological disruption takes hold and it is key to find those that can survive the “churn”, according to Michael Russell, who runs the £14.1m Hermes UK All Cap fund.
Mr Russell said he believes within a decade 50 per cent of the companies in the S&P 500 will no longer be part of the index due to the impact of technological change.
He said oil giants Exxon Mobil and Chevron and industrial company General Electric are likely to suffer as the world moves to renewable energy.
Mr Russell said technology companies that provide “infrastructure”, such as IBM, Intel and Cisco, are likely to lose out as cloud computing replaces the functions they currently offer.
He said many pharmaceutical giants such as Pfizer and Johnson and Johnson will lose out as medical advances render much of their current product range obsolete.
He said traditional retailers and television companies will also lose out as e-commerce replaces traditional distribution models.
The fund manager’s quest to invest in companies that are immune from this disruption has led him to plough cash into aggregates company Martin Marietta, since its products – asphalt and cement – are likely to still be used when building roads in 10 years’ time.
Due to the monopolistic nature of aggregates companies, which tend to dominate access to local quarries, Mr Russell said he also favoured the stock as it "has relatively little competition within a 50-mile radius of its operations".
He said: "We also hold a position in American Water Works, a utility company serving 15 million people. It earns attractive returns and is immune to obsolescence risk.”
Fran Radano, who runs the £416m Aberdeen North American Income trust, is focused on small and mid cap bank shares for income.
He said the large cap banks, which have performed well in share price terms, will be unable to grow much as a result of regulation, but the mid cap banks, such as Glacier Bank, will be able to enjoy the same benefits of an improved US economy and rising interest rates, and still have room to grow.
Simon Laing, head of US equities at Invesco Perpetual, said while disruption is an important trend, the progress of the giant technology companies to date has been helped by low interest rates.
Low rates benefit fast growing companies in two ways, firstly through low financing costs, and secondly, because those companies don’t pay a dividend.
In a world of low interest rates, the opportunity cost of owning those equities is lower, but as interest rates rise, an investor is forgoing a greater amount of income today, by owning stocks that pay no dividend.
He said he has been investing “a lot” into healthcare this year, as he feels the valuations were pushed lower by political uncertainty, while demand will continue to the strong due to ageing populations.
Bruce Bulgin, a partner in financial adviser firm Chadney Bulgin in Fleet, said he tends to get all of his US equity exposure from passive funds due to the difficulty of finding US active funds that consistently outperform the market.
