Lowland’s James Henderson identifies companies at the cutting-edge of tech in the UK and explains how to spot a company utilising tech well.
The main US index, the S&P 500, has a 22% weighting in technology companies, while the UK FTSE All Share has only 1%. The companies driving change and expanding fast in recent years have been the tech giants, such as Apple, Google and Amazon. Such companies, among others, have been central to the outperformance of US equities over UK stocks in the past five years-plus, which has fuelled a belief among some people that the UK will be a continual underperformer.
The strange thing is that the UK has been home to many of the great tech advances, yet they have rarely been commercialised into successful tech companies. The reasons are much debated. The lack of an investor audience with suitably deep pockets and the patience for the long-term investment in tech may be a factor.
Many UK equity investors want to see cash generation and resulting dividends from companies they invest in, but tech companies in the early days absorb cash and often need to return to investors for further capital injections. When these injections are not forthcoming, the business may be sold to an overseas company.
The management team has often been an issue with start-ups. An inventor bursting with ideas may not have the management qualities needed to grow a business beyond the early stages.
In the UK, there are a lack of models to copy. Entrepreneurs who have taken companies all the way have often done so away from the gaze of the stock market, such as Dyson.
Off the beaten track
UK investors should not despair at the minimal tech weighting in the index – there is plenty of cutting-edge tech in the UK that will create real value in the future, but these companies do not reside in the tech sector. Take Rolls-Royce, the development of the Trent engine took years of design and testing., but Boeing and Airbus will be utilising this great tech for years to come. The technology used by British Aerospace is world leading in its area. Elsewhere, AstraZeneca is a world leader in oncology and respiratory research.
A good investment strategy is to find a company with an excellent product that has not been recognised by the market. For instance, one of the most instructive company visits I have ever made was to Croda in the early 1990s. The company had understood the importance and qualities of lanolin (wool wax). This know-how led them to develop the ingredients behind many personal care products. The share price at the time of the visit was 180p, it was around 4800p at the time of writing.
Tech innovation in its broadest sense is what good companies do. Firms are successful because they have an excellent product. Tech and its effective application are often the vital ingredient. UK investors need to find companies with robust products that are globally competitive, and that is exactly what we try to do for the Lowland Investment Company portfolio.
How was the service?
A company that applies technology and service to a very high level will have a winning formula. An example in the UK is Hiscox, the insurance company, which we’ve held for nearly two decades. Their application of tech to the underwriting process combined with a real service culture has led to very strong growth and they have created a large retail insurance business in the US. The share price as a result over the past 20 years has gone from 140p to 1600p with very good dividend payments along the way.
Investing in early stage tech is difficult. Good ideas alone will not make for a good company as there are many other ingredients required, including luck. So few succeed because the pure tech space is very competitive, while the life cycle of successful tech may be short because there is always something new coming along.
The winner in new tech often takes all and rewards for winners are massive. However, there is another way and that is to look for businesses utilising a tech they really understand to make themselves an excellent, competitive company.
Fortunately, the UK has another generation of these companies coming through. It is finding such businesses and building a portfolio around them that will future-proof your investments.
James Henderson is co-fund manager of Lowland Investment Company.