247. The trends changing the world…and how to invest in them

23 March 2023 (pre-recorded 14 March 2023)

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. This week we’re discussing structural themes —themes that are changing the world in which we live and which are typically driven by powerful forces such as innovative technology or changing demographics, even a significant change in consumer behaviour. 

Sam Slator (SS): I’m Sam Slator from FundCalibre, and today I’ve been joined by John Delano, manager of the Invesco Global Focus fund. Thanks for joining us today, John.

John Delano (JD): Thank you. It’s a pleasure to be with you.

[INTERVIEW]

SS: So, maybe we could start with how you identify the companies that you invest in. I believe you first look for structural trends, so, things that are changing how the world works. How do you identify these themes, and what themes are you looking for at the moment?

JD: Well, you’re exactly right. We are looking for structural change going on in the world, and really there’s no secret to it, it’s really just hard work, going out, meeting companies, understanding what they’re doing, things that are changing and reading – and reading quite a bit! Reading anything from annual reports to newspapers to industry reports; there’s nothing better than getting more information to see what things are changing, and how and where customers are moving. 

And some of the ones that we’re looking at right now, are things from cloud computing and medical devices to e-commerce. And these have been going on for years, and we think they are going to continue going on for years, and they create a very attractive opportunity for investments for the fund.

SS: And once you’ve identified those themes, how do you go about finding the best companies to invest in those areas?

JD: Yeah, it really starts with trying to find out how those structural dynamics are being monetised in the world, and finding out where that opportunity lies. So, as an example, in cloud computing, you know, there’s lots of different possibilities. There’s hardware that goes into it, there’s the hyperscalers [large, cloud service providers] that host it, there’s some of the software applications that go on that. And you have to spend the time to understand the individual economics for each business, and to see which ones are differentiated, and which ones people are willing to pay for. And where you’ll find a lot of opportunity in there is, you’ll find various software companies that are able to help people move on to hyperscaler and cloud computing. And then you have some of the large players: Microsoft, Amazon, and Google that also are able to do that. On the other side, it’s sometimes very difficult to make an opportunity or an economic return when you’re looking at some of the hardware, which is less differentiating, it can be more commoditised. 

So, it just takes time of understanding that, talking to customers, seeing what they value, seeing just how substitutable any single item may be, and then waiting for the right price, because it all comes down to that at the end of the day, for the investments as well.

SS: And perhaps going back to something that you mentioned earlier when we were talking about the themes, one of them is the medical devices, sort of the healthcare allocation. Could you perhaps tell us a little bit more about that?

JD: Sure. So, there’s two things that go onto this. One, obviously the world is ageing. We all are aware of that. We see headlines for that all the time. And as we all age, our bodies start to have one or two more issues than when we were all 20, or at least mine surely does! But what you find there is, with technology that’s come on, we have the ability to fix so many of these issues that come up, and it’s a huge new opportunity and society really values that; really values the ability to improve quality of life and extend everyone’s life expectancy. So, we make massive investments in that. And finding the medical technology companies that are able to monetise that, whether it be Edwards Lifesciences [Edwards Lifesciences Corporation] or Thermo Fisher [Thermo Fisher Scientific Inc. ] that help contribute to some of this development, are critical and very undervalued, I think, because people miss the idea that this is something that will go on for as far as the eye can see. 

The idea of aging is something … people use the phrase, ‘demographics is the future that’s already been written’. We realise this, we know we’re going to need more and more of this every year. And there are only a certain number of companies that have the ability and the scale to produce the type of innovation that’s going to be valued by patients, society, governments. So, it has made it a very attractive space. And you see this [in], whether it comes from what we’re able to do to help from heart to cancer detection, to anything in between, it’s a very interesting spot for investment.

SS: And we take it [that], sort of thinking about the medical devices side of things, you’re more interested in the hardware side of things or the drugs as well, and perhaps a bit on the biotech is, or is that just sort of too uncertain an area for you?

JD: When it comes to the drugs, what’s really great is when you can be invested in, if you will, the picks and shovels; the businesses that help develop the drugs, as opposed to having to discover the drugs. So, if you think about WuXi [Wuxi Biologics (Cayman), Inc.] or Lonza [Lonza Group AG] that help, you know, produce the drugs that are so innovative, that’s a great business because there, you’re just riding  that trend over a number of years, and all the winners – and some of the ones that don’t work – go there, but you have that ability. 

To understand and to pick the individual winners from biotech is a whole different dynamic that can add a lot more volatility to some of that dynamic. So, it’s been attractive to find those areas that are producing the drugs or manufacturing the drugs. 

The same for as you think about companies that are producing the materials needed for this or to help identify. Another large position is Illumina [Illumina, Inc.]. That helps you understand the genome, that helps you understand – perhaps informs you – on what might be a good way to address an illness or a disease. And you can better understand it that way. So, all of this that creates knowledge, helps us manufacture, that’s where we’re invested and see the best opportunities.

SS: And earlier you mentioned all the reading that you do around some of these subjects. In the UK, we have a [TV] programme called ‘Have I got news for you,’ and each time, they look at the random publication that nobody’s ever heard of … do you find yourself having to read things like Doctors Weekly to see what doctors are talking about, to get an idea as to how useful some of these things would be? Or do you just stick to company reports and accounts?

JD: No, I mean, those industry type publications or presentations from actual participants in the industry are very, very helpful. Those are the ones who are living it day to day, to help you understand where they find value. Because there’s a lot that you have to know on implementation of any kind of procedure, right? So, if you’re a doctor and you’re using a new drug or a new procedure, you get the idea of what’s easy, what patients find helpful, what doctors find helpful, where the friction is. So, something can look fantastic on paper – we all know this – but when you go into real life, there’s a few extra hurdles that no one ever brought up before, so, you need to be aware of that. And you don’t get that simply from reading some general report on a company. You get it more by hearing what participants have to say.

SS: And how often would you change a theme or a stock holding?

JD: Well, the themes, as we talk about some of the structural changes going on, these should be ones that play out over years. So, you shouldn’t see a lot of these changing; maybe some variation of them because something new comes about. So, you’ve seen a lot of artificial intelligence conversations going on lately. And so, that’s created new opportunities for some of the hyperscalers, if you think about Microsoft [Microsoft Corporation ] and Alphabet [Alphabet, Inc.]. But some of the individual names might change a little bit more often, but typically we hold those for three to five years anyway within the portfolio. It’d be great if we had reason to change them because everyone realised just how attractive they were in a much shorter period of time. But you’d see more turnover perhaps in some of the names than in the themes because the themes are enduring and going on. The names are partly responsible or the result of the prices that they’re at right now.

SS: And one of the things I noticed having a look at the fund was that your outlook for China seemed to have changed in recent months; the allocation has gone up quite considerably. Could you perhaps expand on that for us, please?

JD: Happy to. So, the view on China has actually been fairly consistent and one of the benefits of having some of the grey hair that I have is some of the experience that I’ve had over the last 20 years in the industry. But the development in China, I think, has been fairly consistent for the last 10 years. People tend to get very nervous around any type of political change. So, last October you had a number of people very concerned about what the regulatory outlook might be-  whether that was covid zero responses, or just overall regulatory environment for industries such as the tech industry. The portfolio owns Tencent [Tencent Holdings Ltd], owns Alibaba [Alibaba Group Holding Limited], WuXi, another healthcare company. What’s changed is actually people have gotten more comfortable with what’s happened. We’ve seen the covid zero policies relaxed and we’ve seen more support for a number of industries, whether that be property, whether if you think about that’ll be for consumption, and a view that says some of the regulatory adjustments have run their course.

So, what you’ve really seen is actually everyone else has now felt more comfortable about China. Our positions have actually appreciated greatly over that time, which has increased it, but we have been very consistent in our belief that some of the world’s leading companies are available. But you have to understand that the investing environment there, and people can have quite large swings perhaps in their assessment of that. We still hold that there’s very attractive opportunities there. And with the geopolitical conversations that go on, I think you’ll find that, over the next few years, …you’ve heard the phrase, ‘it’s competition, but you need cooperation,’ and finding a balance between that in these relations and sometimes it takes a little bit of trial and error to get there. But ultimately that is where this relationship I think ends up. You will have areas you cooperate, areas you compete, but you’ll also realise that having a very good dialogue between China and the rest of the world is something that’s beneficial for all.

SS: And you’re taking on sole management of this fund in the summer when Randall Dishman retires, are you be going to be doing anything differently? Will the process change in anyway or what should investors expect going forward?

JD: Investors should expect continuity. You know, I’ve been working with Randall for over 10 years and actually, he was instrumental in me joining our larger group, many years ago. And we’ve had a fantastic working relationship, and the underlying philosophy is something that we share and perhaps it’ll always be a slightly different weightings on some names versus the others based on my evaluation than his, but when you think about that idea of what is structural growth that’s going through the economy and the world, [and] where do we want to be exposed to that? And how comfortable are we with the concentration within the portfolio, to express those views, to monetise that? Those won’t change whatsoever. So, I think you’d be looking at a very similar portfolio and process, post my taking over sole responsibility that you’ve had for the last number of years.

SS: That was really interesting. Thank you very much.

JD: Yep.

SW: Invesco Global Focus is a high conviction, concentrated fund, which invests in structural growth winners. The managers’ approach is refreshingly simple: understand the structural trends which are changing the world and then invest in the best companies which are benefitting from these trends. As mentioned in this interview, current lead-manager Randy is retiring in June 2023. John will take over as lead manager at that point. To learn more about the Invesco Global Focus 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.