182. Flushing toilets and radio frequency technology: innovation at its best

22 March 2022 (pre-recorded 7 March 2022)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. Today we’re talking innovation and technology, alongside interesting topics like water conservation and the Internet of Things, as well as the role of UK smaller companies in tomorrow’s innovation.

Ryan Lightfoot-Aminoff (RLA): I’m Ryan Lightfoot-Aminoff and today I’m joined by Guy Feld, manager of the Marlborough Global Innovation fund, which is on FundCalibre’s Elite Radar. Guy is also joined today by Tom Hutchinson, an investment analyst within the team. Guy, Tom, thank you very much for your time today.

[INTERVIEW]

RLA: Now you modelled this fund from a global technology fund to a global innovation fund, what was thinking behind this?

Guy Feld (GF): Thanks, yes, you’re absolutely right, we relaunched the fund as Global Innovation in September 2021. And the reason for this was to give us the freedom to invest in a much broader range of companies at the forefront of global innovation. These ground-breaking companies, the genuine innovators, have always been a rich source of opportunities – and never more so than now, because the world is changing faster than ever before.

To give you an example, if we look at the speed at which US households are adopting new technologies – then this process has accelerated sharply over the past century and a half. It’s hard to imagine now, but in 1860, flushing toilets represented ground-breaking new technology, with only 1% of US households possessing one. Ninety years later in 1950, the figure was still only 70%. In fact, it took nearly 130 years for the flushing toilet to become universal in US homes. Since then, the adoption of new technologies has accelerated at a phenomenal rate. Only around 4% of US households had a tablet computer in 2010 – seven years later nearly two-thirds did.

So, the point I’m making is that there’s an enormous amount of innovation going on – and the speed at which we’re embracing these changes is accelerating. Technology is a big part of that but in the investment world, technology companies can be very narrowly defined. And we think the opportunity is a lot wider – innovation is about much more than hardware, software and silicon chips. We want to be free to invest in all sorts of exciting innovative companies around the world, so we’ve widened the remit so we can do exactly that.

If you look at the companies in the fund, then yes, we have some world-leading technology companies, but we’ve also got really interesting businesses breaking new ground in a range of other industries. Tom can you give an idea of the range of different sectors we hold in the portfolio.

Tom Hutchinson (TH): Absolutely Guy, our investments cover a whole range of different themes. So, we’ve got great tech and tech-related companies in areas like manufacturing semiconductors, facilitating digital payments and data analytics. But we’re also invested in businesses breaking new ground in really interesting ways in other areas, such as reducing water consumption and the traditional print and digital media industry. So, they’re a diverse range of companies, but the common factor is they’re all at the cutting edge of innovation in one way or another.

RLA: And how do you define an innovative company?

GF: Well, the Shorter Oxford English Dictionary defines innovation as”‘the alteration of what is established” and that’s a good starting point. So, if you think about the printing press, before the printing press was invented, books were often written and illustrated by hand. The advent of the printing press was a huge innovation and led to knowledge spreading at a speed and on a scale never seen before in history. And the compass, which enabled mariners to navigate safely far from land, opening up the world to global exploration and trade.

More recently, we’ve had the internet – the creation of the World Wide Web in 1989 has transformed our lives. So, that’s what we have in mind when we’re talking about innovation– ‘the altering of what is established’. But, as investors, we need to be a little bit more specific. What an innovative company means to us is one that’s creating ground-breaking new technology, using technology in fresh and original ways, or generating new ideas in other high-growth areas….or we might invest in companies that give us indirect exposure to these waves of change.

TH: Yes, for example, we hold a media company that’s a real innovator because of the way it’s using technology in new and creative ways. The company has built up a lot of data about its audience and is now making the most of what it knows about them to increase its readership and build up the revenues it generates from its content. What it’s also been doing is looking at the assets it now has and how it can use technology to maximise revenues from them. So, as a publisher it has an archive of newspaper front pages reporting on historic events. Everything from the first man landing on the moon to major sporting events. What the business is doing is exploring turning these front pages into digital products, using what are called non-fungible tokens, or NFTs, which are essentially digital certificates that verify ownership. So, people would be able to ‘own’ the asset – own the digital versions of these historic reports. This could create a lucrative new revenue stream for the company. It’s also using its connection with sports fans to generate significant income from online ticketing and sports betting. This is an example of a traditional business that has adopted technology in an innovative way to improve its prospects moving forward.

RLA: Now this fund is a global multi-cap fund, but your team is known for its specialism in UK small caps. Do you still have a bias towards UK smaller companies in the fund?

GF: The thing about innovation is that there are small, growing businesses that most people won’t have heard of, coming up with ideas that could change all of our lives. But, equally at the other end of the spectrum there are global giants that are also pushing boundaries in ways that are just as exciting. That’s why we like to be free to hold innovative businesses of all sizes – and in different regions and different business sectors. So, we hold Korean giant Samsung, which has a total stock market value of around £300 billion pounds. To put that in context that’s greater than the GDP of a country like Malaysia. I’ll hand over to Tom to talk about why Samsung is such an innovative company…

TH: Thanks, so Samsung is a producer of consumer and industrial electronic equipment, with products including semiconductors, personal computers, mobile phones, televisions, home appliances and more. One example of innovation by the company is the development of its mobile phone with a foldable screen.  If you imagine a standard-sized mobile phone, then with Samsung’s model you can open it up. That unfolds the screen and doubles the size of it. Samsung has invested heavily in research and development and it reimagined how users could interact with what has become an essential device.

Over the past decade, the company has led the way in smartphone innovation, and it’s telling that many features have later been adopted by competitors. For example, AMOLED displays that increase how vivid colours are, waterproof and dustproof functions, mobile wallet capability, advanced camera tech, and folding displays. So, while Samsung is a giant company – it’s also a highly innovative one.

GF: I should emphasise though that, as a team, we have a lot of experience investing in small caps – and we always have at least half of the Global Innovation fund invested in smaller companies. They’re too small for many fund managers to consider, fewer analysts looking at companies this size, and often an opportunity to invest early in the growth stories of tomorrow.

We currently have about 40% of the fund in UK companies – and we’re certainly seeing attractive opportunities at the moment, because the UK stock market looks cheap in relative terms, compared with other markets. Much of this is still the overhang on sentiment from Brexit and the impact it may have on the UK economy. In addition, there have been more recent concerns about sharply rising inflation in this country and the possible need for higher interest rates from the Bank of England to counter this. Britain is, however, looking to rebound more strongly from Covid, having been very much on the front foot with its vaccine rollout. The UK government is also seeking to differentiate itself from Europe with a programme to reduce or to eliminate legal and bureaucratic friction to trade. Britain has a long tradition of innovation and is still home to the creation of world-class intellectual property from both its strong academic institutions and vibrant private sector. So, we think the UK is a fertile hunting ground for innovative companies.

We’re not just seeing attractive opportunities in the UK though, we have a global remit that means we can seek out the most exciting, innovative companies wherever they are in the world. We’re invested in a lot of US companies, but we also hold South Korean, Japanese and Israeli companies.

Our long experience of investing in smaller companies really helps us. Because we know a lot of chief executives in technology and other sectors and hearing what they have to say helps us establish exactly which companies really are genuine global innovators.

RLA: Thank you. And your long-term themes include some that we’ve heard of before from other managers like digital payments, cloud and automation. But you’ve got some different ones too that I wanted to elaborate on, starting perhaps with water conservation?

GF: You’re absolutely right, we have a number of key themes – or as we look at them: ‘waves’. We look for companies that are benefiting from powerful waves of change that are altering the way we live and work… just recall what has been achieved in the two short decades that have passed since we went into the new millennium. Tremendous progress has been made in a myriad of different areas including major improvements in wireless and wireline telecommunications, the internet, e-commerce, payments, gene sequencing and other medical advancements, artificial intelligence, virtual reality, the consumption of digital media including music, movies, video games, among other waves. Our daily human lives have been profoundly affected in several ways. And one of those waves of change is water conservation. So, I’ll hand over to Tom to talk about that.

TH: Thanks yes. To put the issue of water conservation in context, it’s estimated that globally 2.3 billion people live in water scarce areas and that by 2030 water scarcity could displace 700m people. Therefore, preserving and recycling water is going to be essential to the future of the planet.

Evoqua is a provider of water treatment products and services to industrial customers and public sector institutions. It serves some of the largest organisations in the world, in industries ranging from pharmaceuticals and healthcare, to food and beverage companies and semiconductor manufacturers. What Evoqua does is helps these organisations filter and reuse vast amounts of water used in their industrial processes.

It also provides a system to enable water companies to remove PFAS, [Perfluoroalkyl and Polyfluoroalkyl Substances – which is essentially a ‘forever’ chemical for drinking water supplies. These chemicals are used in the production of fast-food wrappers, non-stick pans and firefighting foam, but also find their way into the water supply and have been linked with health issues such as cancer. US President Joe Biden is targeting $10 billion of spending for dealing with the problem of PFAS, so this is likely to be a major growth area moving forward.

Water is becoming a very valuable commodity and we believe that investing in a company like Evoqua that’s at the forefront of developing and incorporating technologies to purify and conserve it, is a sensible long-term investment.

RLA: Now another theme is radio frequency technology, maybe just explain what that is and why you believe it’s a long-term theme?

TH: Absolutely, so, radio frequency technology is just one part of wider communications technology and US company Qualcomm is a real pioneer in this area. This technology is essential for products such as mobile phones, broadband equipment and connected devices. Qualcomm has an incredibly innovative history. Back in 1985, it applied what is known as Code Division Multiple Access, or CDMA for short, in a way that essentially transformed wireless communications. This became the backbone for 3G technology, and subsequently defined 4G and now 5G. This innovation has transformed people’s day to day lives, for example, being able to instantly message your friend halfway across the world, streaming a film on your phone, using Google maps to find the closest tube station, or enabling your car to notify you of a traffic jam ahead. The company was historically focused on mobile technology, but they recently announced that they are looking to apply their technology to a multitude of applications addressing the Internet of Things. One example of this is their focus on cars, whereby technology can facilitate automatic safety systems, an interactive cockpit – think about the latest cars which have iPad-like control panels – and autonomous driving, and recent deals include those signed with BMW and Ferrari. Qualcomm is a company with extremely rich intellectual property, and we’re excited to see how it penetrates new product categories moving forward.

RLA: Thank you, and finally before we move on, you’ve just identified there the Internet of Things, this encompasses a whole range of opportunities, from both the hardware and the software space, maybe you can just go into a bit more detail on that please.

GF: Yes, so the Internet of Things describes a world where physical objects become ‘intelligent’ and can generate, process, store and transmit data to other devices or systems. Examples of this would include smart meters that gather data on energy usage and send that back to the supplier to enable more timely and accurate billing. Other examples include wayfinding, where technology in, say, a large multi-storey building helps guide a person to their destination using a mobile device. Also, ‘smart homes’ with fridges that tell you when you’re running out of milk or other items. Another interesting example we have is a company whose ankle-tags facilitate more cost-effective and humane offender monitoring. These tags are connected to the Internet of Things and monitor the movements of the offender. It costs the taxpayer more than £40,000 a year to keep someone in prison in the UK. Tagging offenders can avoid putting them behind bars and saves the taxpayer a lot of money. So, as I’ve said, generating both social and economic benefits.

RLA: Thank you. On a higher level, with high inflation and rising interest rates, we are going into an environment that may be harder for some companies such as the ones you invest in – high growth – how do you see things panning out with that in mind?

GF: The reality is the portfolio is relatively well-positioned because we don’t hold many highly-rated growth stocks.  What I mean by that term is companies that have been delivering fast growth but are also on high share price valuations as a result. As you quite rightly say, these companies have gone out of favour recently with investors in quite a big way.

Of the 32 listed stocks we hold, I would say around a quarter are what I would call highly-rated growth stocks. Most of our companies tend to be more in that camp of special situations, growth at a reasonable price, and what are termed ‘value’ stocks, where we believe that for one reason or another they’re trading on a share price that doesn’t represent their true value.

So, if the picture you’re painting of what’s happening in markets is correct, then we believe we’re less vulnerable to increasing risk aversion, where the market tends to fret more about stocks with high levels of expectation built into the share price. And to broaden things out, I think the really important thing about our fund is that we’re investing in these powerful waves of global change.

As I said at the beginning, the world’s changing faster than ever and we like to think we’re invested in some of the companies that are at the forefront of these changes. We believe that’s a pretty exciting place to be – and a really interesting long-term opportunity.

RLA: Well Guy, Tom, that’s been really interesting, thank you very much for your time today.

GF: Thank you.

TH: Thanks Ryan.

SW: The IFSL Marlborough Global Innovation fund is a concentrated portfolio of fast growing, innovative companies, investing across a range of sectors. This fund is about hunting for the giants of tomorrow through targeting exciting and innovative businesses. To learn more about the Marlborough Global Innovation fund visit fundcalibre.com – and don’t forget to subscribe to the Investing on the go podcast, available wherever you get your podcasts.

Please remember, we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at the time of listening. Elite Ratings are based on FundCalibre’s research methodology and are the opinion of FundCalibre’s research team only.