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Global Industry Analyst Spotlight Series — Internet/emerging technology

Brian Barbetta believes markets are bad at pricing the sort of big disruptions that are currently transforming industries and companies around the world. Find out why he is particularly excited about the potential opportunities created by machine learning, changing consumer preferences, and developments in fintech.

The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only. 

Key points

  • I believe markets are bad at pricing nonlinear changes, where the future will look very different from the past.
  • Innovation is transforming a broader range of industries than many appreciate, and is being driven by companies around the world.
  • I am particularly excited about the potential opportunities created by machine learning, changing consumer preferences, and developments in fintech.

We believe our GIAs — specialist stock pickers for whom industry research is a career path — are one of Wellington’s key differentiators. Their role is to use fundamental analysis to identify investment opportunities for clients’ portfolios. In our view, stock selection based on in-depth knowledge of an industry has the potential to generate strong investment performance over the long term.

Introducing our analyst

HOW DID YOU BECOME AN INTERNET AND EMERGING TECHNOLOGY ANALYST AND A PORTFOLIO MANAGER?

I’ve followed my passions. At Wellington, I’ve been fortunate to be able to cover and invest in the areas of the real world I am most passionate about. Consumer technology has always interested me. Like a lot of other enthusiasts, I built computers back in the late 1980s and early 1990s and went on to host my community’s online bulletin board system from my basement. I’m now fascinated by what’s changing in consumer technology, the internet, virtual reality (VR), and more. It’s fun to cover these companies. My recommendations for digital entertainment services have become very popular amongst my colleagues in our shelter-in-place environment.

In my first year at business school, I was working full time at a consulting firm. I loved my job and always planned to go back there, but a senior colleague suggested I should try another type of job over the summer. I was also passionate about investing, so I came to Wellington to cover video games as an intern in 2011, loved it, and was fortunate enough to be asked back full time the following year.

What I like about being a portfolio manager on our global innovation-related approach is the opportunity to take the framework I’ve developed for analyzing technology companies and apply it more broadly across other sectors of the equity markets. I look for nonlinear change — big disruptions that will make the future look very different from the past.

Industry of focus: Internet and emerging technology

WHAT IS DISRUPTIVE INNOVATION AND WHY DOES IT MATTER?

It’s about nonlinear change, which is typically ― but not always ― driven by technological change. For example, the falling cost of computing has led to nearly every device in my house having a microprocessor in it, and they’re soon going to have microphones, speakers, and displays. This will make the future very different.

I believe this kind of nonlinear change is a massive opportunity because markets are bad at pricing material change. In many respects, the market is a mean-reversion device: For many sectors the future resembles the past. When there is nonlinear change, the market’s response is often inappropriate. Sometimes, it is far too optimistic. At others, it doesn’t properly appreciate the change and is far too pessimistic.

WHAT IS THE KEY TO INVESTING IN DISRUPTIVE INNOVATION?

It’s all about finding where there will be nonlinear change, assessing who the winners and losers will be, and then waiting for the right timing and price. For me, the key is deep industry expertise, which gives you the ability to forecast those variables.

In terms of timing, it’s about being able to analyze the opportunity and being patient to wait for the right time and price. Many investors in disruptive innovation are just chasing the next big idea. It’s easy to get overexcited and buy into unsubstantiated claims of future potential. Our team focuses on identifying when companies are starting to deliver the growth that will justify the price. Ideally, we wait for despair to set in after the hype has failed to produce in the short term what some investors had hoped for. Then, we buy on that despair.

Change is a constant, and the opportunity set is always growing. Many people focus on the sectors that are obviously engaged in technological innovation, such as information technology and biotech. I see the opportunity as very broad across all sectors. In my view, there are very few companies that don’t have the potential to be disrupted or disruptive in their industries.

WHAT KIND OF COMPANIES DO YOU LOOK FOR?

There’s no empirical checklist, no set of quantitative variables. It’s more a matter of judgment: You know the right sort of company when you see it. That’s the benefit of Wellington’s broad and deep industry knowledge and experience. There’s a pattern to companies that are innovative and on the cutting edge, with a management team that’s leaning in to change. The hallmark of a team that has the right mindset and culture is when they are constantly trying new and different ways to serve their customers and are willing to make big investments in doing that. We favor management teams with a track record of success in that kind of investment.

We have a long-term mindset and look for companies with sustainable business models that can drive share growth in a particular market through the entire economic cycle, not just for a few quarters. We’re not looking for slight one-off improvements in efficiency. We want companies that can find innovative ideas consistently, year in, year out. That is what we believe will help them to keep beating the competition.

IN WHICH AREAS OF THE MARKET DO YOU FIND THE MOST INTERESTING INNOVATIVE COMPANIES AT PRESENT?

Today, we’re focused on three main areas. The first is the continued growth driven by machine learning and the impact that’s having in changing industries. In a recent annual letter from Google, co-founder Sergey Brin said, “The new spring in artificial intelligence is the most significant development in computing in my lifetime.” Someone who built one of the most successful companies in history, based on the invention of the internet, thinks artificial intelligence is going to be a more significant development. That’s a bold statement. The large internet platforms continue to see great opportunities to drive growth using machine learning. Now, the proliferation of early machine-learning technology that drove growth in internet businesses is starting to find a place in some of the software-as-a-service (SaaS) vendors. For example, customer service software can help identify when a customer is likely to churn or is primed for upselling new services.

The second area is consumers’ shift in spending from things to experiences. Once they own a smartphone, that’s pretty much the last gadget most consumers need, and they prefer to spend money on exploring the world. People think of millennials as the Instagram generation. Actually, they are spending more of their money on travel and having unique experiences, and we’re finding great opportunities in companies meeting that demand. We also see changes in the way consumers approach companies. I believe that the trend toward insisting that a company share your moral values or environmental principles will become more and more important in the future.

The third area is the disruption of the financial system driven by technology. Fintech is improving access to finance and providing greater convenience for consumers. Digital payment companies offering you a one-click checkout when you’re shopping online can change the way you spend money. We believe this disruption is still in its early stages and will continue to create potential investment opportunities for decades to come. Bringing the unbanked and underbanked population online is a massive opportunity for next-generation fintech companies.

IS INNOVATION MAINLY COMING FROM THE US?

Definitely not. Some of the most interesting companies coming to market today are in emerging markets, and we expect that to continue. As Figure 1 shows, venture capital investments are increasingly focused outside of the US. This trend is well established, dating back nearly two decades, and it is supporting many of the dynamic companies we expect to lead the next waves of innovative disruption across a broad range of industries. That is why we believe a global perspective is critical.

Figure 1

The US's share of global venture capital investing is declining

WHAT DO YOU SEE AS THE MAIN RISKS WITH INNOVATIVE COMPANIES?

The risks are not unlike other investments. The big questions are: Will the future look like you expect? Will the company you own remain a leader? And are you paying a reasonable price for attractive potential return? Those are the key variables I consider for any company I invest in.

I don’t see these investments as intrinsically more risky than any other stocks. The use of daily volatility as a measure of risk can lead some people to conclude that they’re more risky. But I think companies that are betting on changing the future are a better place to invest capital than companies that are betting on the future looking like the past. So, while other stocks may be more stable day to day right now, their businesses are far more at risk in the medium to long term in my opinion.

Of course, some important governance matters may need to be taken into consideration ― for example, with companies led by founders who are real visionaries. While the founders’ power over the company can help them to make great long-term investments, there is also the risk that their judgment becomes faulty. This problem is clearly not unique to innovative companies, but it may be more common, given that many are founder-led.

YOU ALSO RESEARCH PRIVATE COMPANIES. WHAT DO YOU SEE AS THE BENEFITS OF COVERING COMPANIES IN BOTH THE PUBLIC AND THE PRIVATE SPACE?

I believe this brings many benefits. Over time, it has helped me to build a deep understanding of and relationships with privately held companies in my area of focus. As these companies come to the public markets via initial public offerings, I believe this gives me a lead on many other investors in knowing the management teams, how they operate, and the industry environment. This work on privates gives me a more complete picture of the competitive landscape.

Please see the important disclosure page for more information.

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