No Kodak moments – we can all cash in on the digital revolution

Technology is very much of the moment. It’s the investment theme that has driven the US stock market to claw back all the losses it suffered earlier this year – with the big five tech stocks (Alphabet, Amazon, Apple, Facebook and Microsoft) leading the way. 

This market surge has happened despite the US economy still being mired in recession, a fact that has caused some investment experts to utter understandable words of caution. Indeed, the market fell sharply at the end of last week. 

Notwithstanding continued concerns over the current market valuations of these companies, the relentless rise of the tech giants is not hard to fathom. Technology is increasingly seeping into the way we all live our lives, a trend given an almighty push by the pandemic and economic lockdown. 

So, for example, many of us are now working remotely from home and for the first time are being required to embrace new technologies such as video conferencing (supplied by the likes of Zoom) and quick work communications (Slack). In my case, rather gingerly to begin with, but then like a duck to water. 

Similarly, outside of work, we’re being nudged into conducting more of our lives via our mobile phones or computers – everything from social distancing family ‘get togethers’ via apps such as House-party, watching films via Netflix, through to mobile banking and arranging our weekly food shop to be home delivered. 

Technology is also revolutionising the way many businesses now operate. Robin Brown, managing director of investment bank Stephens, says a ‘huge digitalisation of processes’ is taking place within companies, enabling them to become more efficient and drive down costs. It’s a trend, he says, that is unstoppable. 

It’s a view shared by other experts although they talk in more Darwinian terms. Their opinion is that companies which fail to embrace technology are in danger of falling by the wayside. 

Said Tazi, an investment manager with Swiss bank SYZ, says coronavirus has fast-forwarded the introduction of a new digital age and warns that companies which do not embrace technology ‘might not remain competitive’. 

Tom Fitzgerald, a fund manager with investment house EdenTree, describes the relentless focus on technology by many businesses as ‘disruptive innovation’. He says: ‘Technology can no longer be seen, as many people see it, as a sub-set of the investment world. It’s permeating all business sectors and is a catalyst for change. Companies need to innovate in order to survive. Those that do will thrive. Those that don’t will die.’ 

To back his point, he refers to the dramatic business fall of American camera giant Kodak. In the 1980s, it dominated the market in film and film cameras. But it then inexplicably failed to respond to the move from analogue to digital, leading it to file for bankruptcy in 2012. The Eastman Kodak company that exists today is a shadow of its former self. 

Fitzgerald warns there will be more ‘Kodak moments’ in the future as businesses fall victim to disruptive technological innovation. More recent examples, he says, include the likes of US department store JC Penney (America’s answer to Debenhams) and US clothes retailer J Crew (competitor to Gap) which both last month filed for bankruptcy. Both businesses, says Fitzgerald, were too dependent upon the declining high street. Indeed, he is convinced that ‘disruptive innovation’ will cause the make-up of the S&P500 Index – the index comprising America’s 500 biggest listed companies – to change dramatically. 

Innovative businesses in growth mode, he says, will join the index while others will go the way of Kodak and fall out of it. Half of the current constituents of the index, he believes, will be removed from it over the next decade. 

So, how do investors embrace such ‘disruptive technology’ within their portfolios to positive effect?

HOW TO GAIN ACCESS TO THE DISRUPTERS 

For investors who want exposure to the big technology giants – Apple, Alphabet, Amazon, Facebook and Microsoft – the best approach is to buy an investment fund that holds all or some of these companies in their portfolio. The simplest and cheapest option is to purchase a fund that tracks the performance of the S&P500 Index. 

The big five tech stocks now make up nearly a quarter of this index and are key drivers behind its performance. So in buying such a fund, you are getting exposure to a big chunk of technology. For example, investment house Vanguard runs an S&P500 exchange traded fund that tracks the index. Bought directly, the minimum investment is £500 or £100 monthly. The annual charge is a competitive 0.07 per cent. Given the heady state of the S&P500 Index, investing monthly rather than in one go may be the most prudent strategy. Some experts believe the S&P500 Index has run ahead of itself, leading to a disconnect between the US stock market and the US economy. 

Last week, Jeremy Grantham, co-founder of investment house GMO, said: ‘We are in the top 10 per cent of historical price-earnings ratios for the S&P on prior earnings and simultaneously are in the worst 10 per cent of economic situations, arguably even the worst 1 per cent.’ In other words, the US stock market looks overpriced. So tread carefully – market falls cannot be ruled out. 

An alternative ‘tech’ approach is to buy a fund run by a manager who passionately believes that the tech giants – despite their inflated prices – still provide long-term growth potential. As a result, such stocks dominate their portfolios. 

For example, investment trust Scottish Mortgage – managed by Edinburgh-based investment house Baillie Gifford – has more than 10 per cent of its assets in Amazon.

It also holds key stakes in other ‘disruptive’ businesses such as electric car manufacturer Tesla and Netflix. Investment fund Baillie Gifford American (see Fund Focus opposite) has Amazon and Alphabet among its top 10 holdings as well as positions in Netflix and Tesla. 

Other possible options include investment trust BlackRock Throgmorton and fund Sarasin Thematic Global Equity. 

Throgmorton has a focus on identifying tomorrow’s winners, albeit in the UK smaller companies space. Research analysts QuotedData says ‘identifying industry change, investing in tomorrow’s winners, and shorting unsustainable business models [profiting from the shares falling in value], are core parts of the trust’s investment process’. 

It adds that manager Dan Whitestone believes that the economic disruption caused by coronavirus ‘will accelerate the pace of change in many industries’. Sarasin’s fund invests in companies benefiting from key global trends such as automation and digitalisation. 

Josh Sambrook-Smith, equity analyst at Sarasin, says a whole swathe of technology companies, most US based, are enabling companies to do business better. This is through helping them better analyse customer data, assisting them in finding more customers on the internet and embracing SMS notifications within their contact with customers.

BUYING FIRMS WITH EYE ON INNOVATION 

An alternative strategy to just buying exposure to the big tech stocks is to purchase shares in companies that are employing technology to transform their business models. 

EdenTree’s Fitzgerald runs the £210million Amity International investment fund. Although its top holdings are tech giants Alphabet and Microsoft, the fund also has exposure to companies that are radically adapting their businesses in response to new technology. 

They include waste management company Biffa and packaging giant DS Smith – both UK listed. In the US, it holds companies such as sports brand Adidas and healthcare business Medtronic. Fitzgerald says: ‘Biffa is innovating on so many fronts. It is trialling electric waste collection vehicles and intends to have no petrol-fuelled ones by 2040. It’s also a true pioneer in recycling technology with 85 per cent of milk cartons now containing material recycled by the company.

‘Similarly, DS Smith is using state-of-the-art monitoring technology and data analytics to improve the efficiency of its recycling operations. This focus on innovation has helped the company differentiate itself from peers in a competitive market while also improving the overall efficiency of its business.’ 

In the US, Fitzgerald is impressed by Adidas’s focus on its employment of new technologies such as 3D printing and digital design tools in developing products that use fewer materials and create less waste. It also has a booming e-commerce arm. 

He also describes Medtronic’s development of the ‘Sugar IQ’ app for diabetics as ‘revolutionary’. Used in conjunction with its portable ‘Mini-Med’ insulin pump, it ensures diabetics’ blood sugar levels remain at all times within safety bounds. ‘

As an investor in such companies we want to see evidence of perpetual change and use of disruptive innovation,’ says Fitzgerald. 

Russ Mould, investment director of wealth manager AJ Bell, says a number of housebuilders and estate agents – including Taylor Wimpey and Foxtons – have used ‘virtual tours’ of sellers’ homes to sustain interest from buyers during lockdown. This technology, supplied by US company Matterport, is likely to now be a feature of all home sales. Mould adds: ‘While the fortunes of Taylor Wimpey and Foxtons still depend upon the health of the economy, their use of this technology has helped keep their brands active in front of existing and potential customers.’ 

He also believes pub chain Wetherspoon will benefit from its app that allows customers – once pubs open again – to order a pint and pie from their table without having to queue. 

Neil Campling, head of technology research at London-based Mirabaud Securities, believes technology-focused businesses such as online retailers Boohoo and Ocado are obvious winners of the country’s – and world’s – increasing adoption of digitalisation. As is investment trust Tritax Big Box, which leases industrial warehouses to firms such as Amazon and the parcel delivery company DHL.

FUNDS THAT FOCUS ON TECHNOLOGY

Finally, for investors who believe that disruptive innovation will power the recovery of the world economy after the coronavirus pandemic, there are a number of investment funds available which have a technology focus. 

They tend to be globally invested – but with the biggest slice of their assets in the United States. 

They include investment trusts – all listed on the UK stock market – managed by Allianz and Polar Capital. 

Allianz Technology is run out of San Francisco by Walter Price, a longstanding technology-focused fund manager. 

Over the past five years, the £680million trust has generated a total return of 240 per cent. Its biggest holdings are Microsoft, Amazon and US cyber-security company CrowdStrike. Polar Capital Technology has achieved five-year returns for shareholders of 214 per cent. 

The £2billion trust is 70 per cent exposed to the US stock market and its largest stakes are in Microsoft, Alphabet and Apple. 

But remember: the funds are best held as part of a diversified portfolio.