There are more tech companies in the UK than you might think, says Fidelity's Leigh Himsworth
We live in a world of rapid change driven by technological innovation, creating enormous opportunities for companies and investors.
However, the question of how to access these opportunities can cause a dilemma for UK investors, as the representation of tech stocks in the domestic market is low, compared with the scale of the industry in the US or Asia.
We believe there is a solution to this: despite the weight of tech stocks in the UK indices being extremely low when compared to other major economies, there are more tech companies in the UK than one may think - they are just smaller than the US and Asian giants.
Rather than being frustrated by a lack of opportunity, I think this is great news for stock-pickers - with a bit of legwork we can find companies with enormous potential further down the market cap scale.
I am looking for companies with leading positions in new but potentially large markets, trading at valuations which do not reflect the size of the opportunity and the quality of the management team.
Also, we want companies that do not have an obvious large US competitor – we don’t look for a small UK search engine or social media company, as this has been done already. If I can find these companies before mainstream investors or corporate acquirers, the upside is significant, making them great candidates for the core holdings bucket of the fund.
For example, Blue Prism specialises in robotic process automation. Its robots complete repetitive transactions 24/7 and never get bored - they are tomorrow’s outsourcing, insourced. Any US or Asian start-up would kill for the business’s pace of expansion, with revenue growth in the first half to 30 April 2018 of 145 per cent. We have a 2.2 per cent position in the company.
In a very different mould, GB Group provides ID verification and fraud prevention software - two key areas as the relationship between businesses and their customers becomes ever more digital. It, too, appears to have struck a rich vein of demand, with its fraud protection software now being used in five of the top 10 banks in China, three of the top 10 in Hong Kong, and three of the top 10 in Mexico - truly a global leader. Following a strong run in the shares, we have taken profits, but I remain keen to top up the position if a more attractive entry point is available.
Pharmaceutical research has always been an area of expertise in the UK, and occasionally I come across a company which offers the twin benefits of improving healthcare provision as well as giving shareholders a healthy glow.
Oxford Biomedica is a company that through its unique LentiVector delivery platform allows gene therapies to be delivered safely to patients. This is a system that may revolutionise some areas of cancer treatments and degenerative diseases, and a top five position for us, at 3.3 per cent of the fund.
How we shop, how we consume our media, what we seek from financial services and indeed how we choose to take our holidays - all of these and many more areas have been radically altered by the seamless integration of technology into most aspects of our everyday lives. We seek not to get caught in the ‘value traps’ of older-style media companies or high street retail, in favour of key users of technology such as ASOS in retailing, GVC in online gaming, or niche online retailer Gear4Music.
I have 8.3 per cent of the fund invested in the technology sector, and another 8 per cent invested in technological leaders in the healthcare & consumer sectors - a significant overweight, but a reminder that exciting technology companies are available to UK investors too, for those who are willing to dig a little deeper.
Leigh Himsworth is portfolio manager of the Fidelity UK Opportunities fund
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