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Seeking Out Disruptors

Thursday, June 28, 2018

Q&A with GAM Investments’ Mark Hawtin on disruption in the technology sector.

Can a thematic approach to identifying disruptive technology companies add value?

The range of companies that constitute the investment universe for technology has become more and more diverse. If an investor limits themselves to a universe that is made up of the traditional technology indices, they would never invest in Amazon, for example, which is classified as a retailer. We take the approach that there are a number of significant growing and disruptive themes within technology and by identifying those themes, and then the winners within those themes, we are not constrained by an incumbent view of technology.

What makes a company truly disruptive and, at the same time, sustainable from a growth perspective?

We look for major disruptive trends from both an enterpise and consumer perspective. Examples of these would include the infrastructure move from on-premise digital storage to cloud-based solutions, or the opportunity for digital advertising versus traditional TV or print. Having identified the trend, we look for companies best placed to benefit from it – while best of breed innovation and product will form a part of that, we are concious that in this iteration of technology the network effect is also very powerful. In fact, the network winner often takes most, if not all. An example of this would be Facebook in mobile advertsing; it dominates the segment and makes it very hard for new entrants to have any major impact. Almost 100% of the profit dollars in mobile accrue to Facebook. The network effect not only defines the winners, but can also cement a company’s sustainable growth position.

Globalisation of trade, technological innovations and a changing ecosystem are acknowledged as performance drivers. Which companies within these themes are likely to drive returns and why?

The primary innovation sitting at the heart of the technolgy changes we see today is that of connectivity – everyone can be connected either as a user or a provider of services through platform economics. This is driving whole new eco-systems like Uber, Airbnb, Alibaba or Facebook. It also creates new consumption models such as Spotify for music, Netflix for video or even Dropbox for storage.

Which sectors currently look attractive and why?

We are seeing a lot of interesting opportunities in storage and memory. We believe that the storage requirements driven by big data, artificial intelligence and networks create a fire hose of demand at a time when providers in DRAM (dynamic random access memory), NAND Flash (a non-volatile storage technology that does not require power to retain data) and HDD (Hard Disk Drives) have rationalised to a few players in each market. Storage requirements are growing at 35% annually and this is set to continue for some time. Our investments in this theme are an overarching exposure to all that is happening in disruption today. On the other hand, in the case of hardware and semiconductors we believe many of these technolgies are either becoming commoditised or they are valued as growth businesses when they are really cyclical in nature.

Some of the most disruptive companies today are big data players or are finding new ways of empowering their users while accessing their sensitive data. Could the Facebook-Cambridge Analytica incident have a negative impact or be a setback for these tech companies, especially if more stringent regulation is introduced down the line?

There will inevitably be an impact from regulatory changes, but we see this as being iterative rather than a business breaking change. The example of Facebook and Cambridge Analytica is a good one – Facebooks’ results have not been affected at all by that event. In truth, advertisers do not have anywhere else to go and at the same time users of the network are also faced with few social network alternatives. If anything, we would argue that the effects of tighter controls and regulation will only serve to increase the competitive advantage of the big players that can afford to implement additional security effectively.

Do you invest in IPOs of unicorns (private startup companies valued at USD 1 billion or more) or are you seeking opportunities within newly-listed companies?

Yes we do and this a differentiator for our strategy because we work hard to build relationships with companies well before they approach their IPOs. Thus, when an IPO occurs, we are seen as a serious investor and not just one looking for a quick IPO profit. We participated in the Dropbox IPO, for example, having met them in San Francisco well before its flotation. Other examples of recently listed companies that fit the category of disruptive unicorns include Docusign and iQiyi, both of which we now own.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator of future performance and current or future trends.
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