Technology is changing how we live and work in ways that we could not have conceived a few years ago. The addressable universe for technological application continues to expand and the rate of change is accelerating. Investing in the technology sector has never been as broad, or as exciting.
- We have come an awfully long way since Space Invaders and green computer screens
- All industries are affected by technological progress at some level – and some are being revolutionised
- While the market for the traditional bedrock of technology - devices - has matured, the broader investment opportunity set is expanding
- Although there are clearly signs of excesses in technology stock prices today, this sector will be a key driver of future equity returns
Technology – then and now
Technology: the only game in town? The buzzwords abound - the “internet of things”, in the Cloud, B2B (wasn’t that a pop band in the 1980's? Ah no, that was ABC…). All of this newly-coined terminology is a means of capturing a phenomenon that leaves those of a certain age rather vexed, while Generation X quite rightly looks on and sniggers.
We are now at a point where technology calls into question the every business model, offering new solutions for operational efficiency and client interaction. Until the early 1990s, for most of us, our experience was limited to the ground-breaking move away from our beloved VCRs to new-fangled DVDs. Computers had obviously progressed from the days of green screens and Space Invaders, but at that time, the bulk of the effort was focused upon speeding up existing hardware and improving the underlying software. The arrival of mobile phones for the masses was a game-changer and proved what we all suspected, that Star Trek was closer to the truth than anyone believed.
Then came the commercial usage of the internet (like all good techies, they kept the best bits out of our reach for two decades!). This was clearly revolutionary and the connectivity it brought to both individuals and corporates presented us with brand new horizons. Welcome to the global marketplace, typified by Amazon, powered by Google but still delivered by the Royal Mail!
So much for the whistle-stop tour of the last thirty years. The benefit of recalling how simple the technology story was in the past, is that it reinforces how complex and pervasive it is in the present day. Previously, technology was the poor relation to the bigger business aspiration - it was a mechanism for collecting and delivering data and for conducting through-processing to complete the primary task in hand. Today, it is often the very essence of the business model - Silicon Roundabout, stand up and be counted!
“The arrival of mobile phones for the masses was a game-changer and proved what we all suspected, that Star Trek was closer to the truth than anyone believed.”
Investing thematically in technology
The real difference compared to even five years ago is that technology is reshaping every traditional industry, expanding the potential universe of stocks in which you can invest on a huge scale. In the early days, the impact of technology was felt most clearly in consumer electronics and media, but as its influence has grown, so it has altered the face of advertising (social media), retail (the shift to online) and travel (Booking.com etc).
Why is this relevant? Apart from the obvious point that it is fascinating to consider technology in all its guises, rather than simply assessing product cycles, it also comes at the point when the traditional bedrock of technology - devices - has matured. Indeed, according to the technology research company Gartner, 2017 is the first year that the overall device market (‘phones and computers) will contract globally.
At this point, I would like to thank our good friend Nick Evans at Polar for his insights and thoughts on the shape of technological disruption now and in the future. Mr Evans and Ben Rogoff co-manage the Polar Capital Technology fund and they split the technology world into three buckets, namely, Core, Progressing and Emerging Themes:
- The Core themes incorporate what we see and use today, for example, gaming, streaming, social media, eCommerce, mobile and more recently, virtual and augmented reality. These areas fall largely into the, "new things that new technology lets you do” bucket, and the investable options are fairly obvious – see the “FAANGs” (Facebook, Apple, Amazon, Netflix, Google (Alphabet)) for reference.
- The Progressing bucket incorporates areas that few of us can claim to understand in any great depth: 3D printing, biometrics, robotics, factory automation (by the way, take note, President Trump) and crowd funding. This group is disrupting existing business models, as well as making them more efficient.
- The Emerging category includes technologies such as home automation, power management, medical technology, energy storage and solar power, all of which are changing the way we think and behave.
“Technology is changing the way in which business, and indeed our entire world operates.”
Taking all of this in the round, where do you place your bets in the future? The Polar team is particularly excited about the following areas:
- eCommerce. Total global retail sales amount to $22 trillion and currently, only 9% of that occurs through the online channel, so there is still a long way to go.
- Digital marketing/advertising. This accounts for 20% of total global advertising ($1 trillion globally) and keeps the more traditional advertising account executives up at night.
- Artificial intelligence and cloud computing. These developments change the very way we think about computing and data storage.
- Machine learning (linked to artificial intelligence). This impacts the likes of transport (autonomous driving) or healthcare (drug trials).
- Cyber security. This is topical and an expanding opportunity as we become ever more reliant on technology.
- Automation. This is an all-encompassing theme which changes almost every process of production, in terms of scope and efficiency.
In summary, technology is changing the way in which business, and indeed our entire world operates. Mobile connectivity and the Cloud have swept away the idea of an IT department in the traditional sense. The addressable universe for technological application continues to expand and the rate of change is accelerating.
When we think of investing in the technology sector, we all remember the heady days of the late 1990s when optimism was at an extreme. However, in many ways, the sector has provided proof of concept in the years since then. Although there are clearly signs of excess in technology stock prices today, this sector will be a key driver of future equity returns. Any chance to buy these stocks at lower prices should be embraced for the long-term opportunity they represent.
Chief Investment Officer, The Adviser Centre
19th June 2017
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