Overlooked innovation: don’t miss the forest for the trees

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This is a sponsored article from Wellington Management.

 

Lesser-known names are driving technology and innovation across multiple industries, while helping to solve global issues. This presents high-net-worth individuals with a wealth of investment opportunities.

Mention technology and innovation, and most people typically think of the likes of Apple, Microsoft, Facebook and Google. But in truth, these are a mere few names headlining Silicon Valley’s information technology sector. What is often overlooked is that technology and innovation is a far broader theme that is impacting almost all industries worldwide.

A second misconception is that the valuations of all tech stocks are high, just like those of the above names, and hence difficult to purchase at an attractive price. Add in Netflix and Amazon, and these six names account for almost 25% of the S&P500 Index in terms of market capitalisation1. Furthermore, aside from being household names, their growth story has been impressive, with the share prices of all growing by more than 100% over the five years between 2015 and 2020, with one presenting returns of more than 400%2.

Keen to capitalise on technology’s growth journey, investors frequently ask, “Are we too late?”

In Wellington Management’s view, no they are not.

“There is an array of hidden gems that exist beneath the headlines,” enthuses Yash Patodia, Portfolio Manager at Wellington Management. “These include investments that capitalise on the enormous amount of overlooked technological innovation while simultaneously delivering returns — both financially and in terms of helping to solve global challenges.”

We believe these present a compelling proposition for Asia’s high-net-worth individuals (HNWIs).

Long runway for growth

Cutting-edge technologies such as digital payments, artificial intelligence (AI), big data, the internet of things (IoT) and many more are still nascent, but increasingly they are shaping a multitude of industries. Many of these new technologies are designed and built by companies unfamiliar to most investors — and which offer attractive stock prices. Such names may be involved in tasks that are unknown to most people.

Take the coffee industry, for example. Growers of coffee beans around the world are using sensors, drones and satellite images to monitor the growth of crops, utilising this information to take actions that increase crop yields. Commodity traders are leveraging AI and big data to better predict supply and demand, and to ensure coffee is bought, transported and sold at an optimal price. Importers and distributors are wielding some of these technologies too, but often in a local context to pinpoint retailers. And coffee houses are using advanced digital payment methods to sell their products with greater ease and convenience to customers.

Across the entire supply chain, advanced technologies are being deployed to ensure that coffee travels smoothly from farm to cup — and many of these are developed by unknown yet highly innovative companies. “Innovation has far-reaching impacts on consumers, businesses and society,” notes Wellington Portfolio Manager, Anita Killian. “It creates opportunities for everything from the raw materials up through the supply chain to a technology’s numerous end users.”

A targeted, active approach

Tapping such opportunities demands a targeted, active approach that identifies the winners and losers of long-term structural trends across multiple industries. Rather than focus on the winners of a megatrend, most of whom tend to sit on the higher end of the value chain, underlying and overlooked opportunities are often found within supply chains.

Moreover, as these supply chains become more integrated, and companies service multiple industries, such opportunities become more compelling and widespread. Take microprocessors, for instance. Two decades ago, they were largely sold to makers of computers and other IT hardware, yet today they power a multitude of different sectors. Makers of microprocessors have since significantly grown their client base.

Pinpointing such companies requires deep research capabilities, and experience unearthing such opportunities — attributes that differentiate Wellington Management from its peers.

Purpose matters

An added consideration, especially in the Asian wealth segment, is that HNWIs are now equally as motivated to help fulfil a purpose as they are to grow their wealth. Today’s HNWIs are no longer concerned purely with financial returns; the environment, society and good governance are just as important3.

One study found that more than two-thirds of Asia’s wealth clients want to help create a better future through their investments4, and many HNWIs are known to contribute to philanthropic causes5. As such, investments that on one hand capitalise on the enormous amount of overlooked innovation, while on the other hand deliver both financial and non-financial returns, are in high demand from Asian HNWIs, especially millennials.

The ongoing COVID-19 crisis has elevated this sense of purpose. “Across the region, investors have upped their support for companies that showed great leadership in assisting humanity during the crisis,” says Portfolio Manager Bruce Glazer. “These range from health care companies saving people’s lives, to software and hardware companies enabling work-from-home measures, and digital payment providers that helped governments distribute financial support to citizens.”

One industry, multiple openings

Electric vehicles (EVs) exemplify the opportunity to invest in a sector at the forefront of technology and innovation, while at the same time contributing to a global cause.

While on the surface the bulk of these funds go to the automakers, companies that provide components to these names will also prosper — not just from the EV sector, but from growing demand for these components in other industries. “With electronics expected to account for 45% of a car’s total cost by 20306, a wide range of companies can benefit,” observes Portfolio Manager Brian Barbetta. “These range from miners of nickel used in batteries, to advanced chip manufacturers, to AI firms that provide insights and ideas that support human decision making, and other information of value to vehicle drivers.”

Furthermore, several countries across Asia have committed to phasing out petrol- and diesel-engine vehicles within the next few decades, including China, India, Japan, South Korea7 and Singapore8 — some of the world’s most lucrative markets for car sales. In each case, the government has announced plans to limit climate change, a movement that is gaining momentum among consumers globally. Indeed, with support for environmental causes growing9, and with the number of EVs on the roads expected to increase from 10 million in 2020 to about 145 million by 2030 under present-day policies10, the market is set to flourish in the coming years.

Enhanced decision making

Automation is another area of note. Once thought of only in terms of factories and robotics, automation is increasing productivity beyond manufacturing and across most industries. Trends such as machine vision, 5G telecommunication networks, the cloud and AI that is used to capture, transmit, store and analyse an exploding amount of data are greatly enhancing decision making — and adding convenience and efficiency to consumers and businesses.

In the telemedical industry, for instance, AI is being deployed to help improve robot-assisted surgery, and lead to more accurate diagnoses and treatment. Moreover, robots could soon analyse health care data, like medical imaging or X-rays, to automatically diagnose patients without a physician. And in rural areas, where specialist care is limited or unavailable, surgery and interactions between patients and remote doctors powered by a combination of 5G, augmented reality and virtual reality could significantly transform health services.

Providers of these technologies come from companies big and small, and from all corners of the world.

Everyday needs

In the field of e-commerce, while the current pandemic has allowed a wide variety of companies to thrive, there are still many areas where the industry can grow yet further. Areas like grocery delivery, digital payments and sustainable packaging are still in the early stages of development. Grocery delivery in the US, for example, grew almost 43% in 2020 but still has less than 50% market penetration11.

Moreover, as demand for e-commerce increases, companies providing cloud and digital transformation services too have significant room to grow, as the industry expands into new sectors and segments.

In some Asian countries like China, the community-group-buying model is opening the market to previously untapped populations. This model involves community leaders buying in bulk and distributing goods to the community — thereby allowing new customers access to this service while ensuring their everyday needs, whether food, medicine, clothing and other staple items, are met.

Next wave of innovation

Investment opportunities for HNWIs in technology and innovation go far beyond a mere handful of large companies. These well-known names tend to make investors miss the proverbial forest for the trees.

“The key to investing in the long-term secular themes driving technology and innovation is to look beyond the hype and news flows, dig deeper into fundamentals and understand the trends beyond the trends that can sustain growth for the long term,” says Portfolio Manager Michael Masdea. “Investors should therefore not question whether they have missed the opportunity — but rather ask where the next wave of innovation lies, what this means to them and how they can capture this growth.”

To access more Wellington Management insights and opportunities in the technology and innovation sector, visit our website.

 

This is a sponsored article from Wellington Management.

Sources:

1.https://www.yardeni.com/pub/faangms.pdf
2.https://www.businessinsider.com/what-is-faang
3.https://milkeninstitute.org/events/asia-summit-2020/livestream/esg-capitalism-universal-ownership
4.https://av.sc.com/sg/content/docs/sg-press-release-asia-sustainable-investing-review-2019.pdf
5.https://www.mmc.com/content/dam/mmc-web/insights/publications/2018/november/getting-asia-ready-for-esg/driving-esg-investing-in-asia.pdf
6.https://www.wheelsjoint.com/in-2020-electronics-account-for-40-of-the-price-of-a-car/#:~:text=Around%2045%25%20of%20the%20final,is%20omnipresent%20whatever%20the%20vehicle
7.https://www.roadtraffic-technology.com/features/asian-countries-banning-fossil-fuel-cars/
8.https://www.channelnewsasia.com/news/commentary/singapore-budget-2020-electric-vehicles-ice-ves-hybrid-car-2040-12457240
9.https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/financial-services/ey-sustainable-investing-the-millennial-investor.pdf
10.https://www.iea.org/reports/global-ev-outlook-2021?mode=overview
11.https://www.emarketer.com/content/more-digital-trends-2021-future-of-grocery-digital

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