The broad technology sector has delivered impressive returns over the last few years, with many of the largest software service providers leading performance. As valuations become ever more stretched, questions inevitably arise as to how investors can continue to exploit opportunities within the sector. But there is a danger that investors may become too segmented in their thinking about what they perceive a ‘technology’ company to be. In many ways, all companies are now ‘tech’ companies and the most agile investors are those that are able to capture the points of disruption rippling across many sectors and industries.
A large cause of this disruption is the accelerating rate of innovation in the field of automation and artificial intelligence (AI). According to the International Development Corporation, global spending on artificial intelligence is expected to reach $57.6 billion in 2021. Indeed, some estimates suggest that the global market for robotics and automation is forecast to be worth over $1.2 trillion by 2025. Operational processes, product markets and labour resources are being challenged in unprecedented ways. Industrial manufacturing is one obvious area to see change. Nearly half of US manufacturers and two thirds of German manufacturers are planning to install automated systems within the next five years. In terms of product markets, the most significant secular shift is currently occurring in the car industry. Autonomous driving was once considered to be the domain of Google or Tesla, but traditional car manufacturers are starting to invest heavily in this area. In partnership with Argo AI, Ford has committed $1 billion over the next five years to develop driverless cars.
However, it is not just heavy industry which is experiencing rapid changes; other sectors too are overturning their traditional business models. In banking, mobile applications are significantly changing how customers are being serviced. Focus is now shifting towards digital currencies; though in their infancy, they are challenging old and accepted practices. In other industries, some companies have even set up ‘innovation labs’. The US home improvements retailer, Lowe’s, has done exactly this, partnering with Google Tango to develop virtual and augmented reality tools to help customers visualise living space with the company’s products.
When it comes to investing, we believe that it is important to take a multi-faceted approach towards capturing technological innovations. In equities, we see the merits of investing in dedicated active managers who invest in lesser known entities at the cutting edge of AI innovation. The significant increase in mergers and acquisition activity in robotics and automation over the last few years is deepening the opportunity-set across the market-capitalisation spectrum. While many of the larger tech companies are making significant investments in AI, they also provide the enabling technologies for smaller companies to gain a competitive advantage. Furthermore, we are taking exposure to a passive instrument that captures the broad theme of automation and robotics across the global economy.
Nonetheless, outside of the pure ‘tech’ label, we have taken targeted sector exposures to capture innovations in AI. One of our longer-term themes in equity is healthcare. The automation of large-scale genome sequencing provides huge opportunities in the search for drug therapies. In addition, advances in medical equipment and services are delivering surgical robotics and more sophisticated diagnostic tools. More broadly, we should also consider that many of today’s innovators are not solely located in Silicon Valley. Advances in cloud computing and processing power have provided the enabling technologies for developers to be located anywhere in the world. Our emerging market equity bias towards Asia takes advantage of some of these trends in technology, as does our exposure to Japanese smaller companies.
The impact of technology disruption is also re-shaping the way we think about UK commercial property through the growth in online retailing and falling demand for ‘bricks-and-mortar’ retailing. Here, we have a specific focus on the warehouse and logistics sector that is expected to benefit from supply constraints, owing to the growing demand for purpose-built ecommerce facilities.
Across asset classes and sectors, there are many ways to exploit technological innovations and we believe that investors should not be too constrained in their thinking.
Benjamin Matthews is investment manager at Heartwood Investment Management.
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