From Uber to Amazon: how investors can access the theme of digital transformation

Sam Slator 01/05/2019 in Equities, Specialist investing

Digital transformation is all around us: from the seemingly mundane (finally being able to book a doctor’s appointment online) to the mind-blowing (3D printed braces for your teeth).

There are a wealth of companies – new and not so new that – are disrupting their sectors through digital transformation. But the rate of change varies from industry to industry and from country to country. Just think about my two examples above: two healthcare issues but miles apart in terms of technological advancement.

We have Amazon disrupting the online shopping sector, Rightmove disrupting traditional estate agents, Uber disrupting the traditional taxi market, Netflix disrupting online viewing habits… The list goes on of companies each of us is now embracing more and more in our every day lives.

And as soon as one transformation comes along, so it seems it is quickly followed by another – barriers to entry are low in many cases, so companies need to be on top of their game. For example, we’ve had online travel agencies like Expedia for some time now. Airbnb is a newer phenomenon, further disrupting the accommodation sector.

So this means there are also plenty of opportunities to invest.

Funds embracing digital transformation

There are a few funds that are obvious choices to invest in this theme. For example, Elite Rated AXA Framlington Global Technology. Manager Jeremy Gleeson looks for companies with progressive-thinking management and new technology with proven commercial viability. He says himself that “Technology breakthroughs aren’t always anticipated, which makes the sector all the more exacting to invest in.”

Other, more generalist funds, also invest in the theme, however. Baillie Gifford Global Discovery‘s manager, Douglas Brodie, says “The world has become more dynamic. The unrelenting impact of technology is driving new business creation and forcing change onto what were previously stable industries. This opens up new opportunities for small fleet-footed innovators and we believe it opens up opportunities for us too.” As a result, the fund is full of companies fitting the ‘digital transformation’ theme including Ocado – which has transformed online food shopping – and Zillow, an online property database for renters (and buyers) where rent can be paid on the same site where you found the property.

Scottish Mortgage Investment Trust is another example. Its managers aim to identify businesses which have the potential to disrupt their own industries. Co-manager Tom Slater says: “We want our shareholders to benefit from the transformational growth opportunities that abound in this era of accelerating change.” The trust has Netflix in its top ten holdings. The founder of Netflix saw an opportunity to allocate capital away from the larger cash-generative DVD hire houses and towards online streaming. Today others are trying to emulate its success. Airbnb and Spotify are among its other holdings.

My final example is Rathbone Global Opportunities. Manager James Thomson was an early investor in Amazon and still holds the stock today. He also owns Match Group, the online dating business that owns OK Cupid, Plenty of Fish, and Tinder. The world of dating has changed considerably in the past decade or so and grown phenomenally. As James points out: “More than a third of relationships start online today.” 

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