Uncovering new investment themes and treading carefully ahead
Ben Leyland manager of JOHCM Global Opportunities explains how he’s uncovering investment...
In the 1960s, some 4% of US Federal budget was spent on space exploration, and when Apollo 11 landed on the moon, the dawn of the ‘space age’ seemed assured. But once it became clear that the Soviet Union wasn’t going to challenge US dominance in human spaceflight, the sense of urgency that had driven progress evaporated – along with the cash – and the space race slowed to a stroll.
Today, only around 0.5% of US government spending is earmarked for space and instead, it’s the private sector that is taking the lead.
According to Luke Ward, deputy manager of Baillie Gifford Global Discovery fund, the emergence of software and e-commerce companies on America’s West Coast led to several young entrepreneurs – and lifelong science fiction fans – amassing new wealth. And, frustrated by the chronic lack of progress in space, they decided to take matters into their own hands. Amazon’s Jeff Bezos founded Blue Origin, Tesla’s Elon Musk founded SpaceX, and Microsoft’s Paul Allen co-founded Mojave Aerospace Ventures, partnering later with Virgin’s Richard Branson.
And its thanks to their efforts that rocket technology is improving for the first time in decades: launch costs have fallen from $10,000/kg to $1,000/kg. It’s now practical to build and launch thousands of satellites into orbit each year.
Virgin Galactic, Richard Branson’s space tourism venture, went public last year, listing in the US. He’s looking to fly people into space as tourists and, while the company has yet to put a human into orbit, it can boast a reservation list of more than 1,000 who have signed up to eventually pay $250,000 to travel (briefly) into space.
And, while the world was in lockdown, SpaceX made history in June this year, when it launched two U.S. astronauts into space – the first crewed space launch from U.S. soil in nearly a decade. The company, which Scottish Mortgage Investment Trust invested in in December 2018, is also leading the charge with a constellation called ‘Starlink’ that will deliver high-speed broadband connections to every corner of the globe. “This could help end the digital divide between rural and urban communities, allowing everyone to access important new services such as telemedicine and distance learning,” Luke Ward commented.
And this is probably where the real money in space comes from for investors: the manufacture of satellites and probes – and the high-tech sensors and electronics they use – not the rockets that get them there.
Companies in this area include Maxar Technologies, which focuses on satellites and digital imagery. It’s perhaps best known for some of the satellite images used by Google Maps, but it gets most of its revenue from government and commercial customers.
Raytheon Technologies and L3Harris Technologies also make satellites and sensors that are launched into orbit. Both are top ten holdings in JOHCM Global Opportunities fund*. Manager Ben Leyland said: “We own Raytheon because it is a group of extremely high quality aerospace and defence businesses, with very high barriers to entry based on intellectual property, multi-decade product cycles and longstanding customer relationships.”
There are also long-term possibilities for the healthcare sector. “Discovering new drug structures, growing organs for transplant, creating advanced semiconductors – all would benefit from the lack of gravity and pristine conditions in space,” Luke Ward continued. “Currently we spend billions replicating this environment in labs here on Earth.” One company called Tethers Unlimited is laying the early foundations for this, exploring ways to assemble vast structures in orbit, while another called Made in Space is refining weightless 3D printing on the International Space Station.
Space, by its nature is risky, and expensive. But it is exciting. So, while investors shouldn’t look at space as a ‘core’ investment, some might like to put a small amount into the ‘satellite’ part of their portfolio.
*As at 31 July 2020