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We’re on the cusp of the next big tech wave and, in our view, we’re all poised to benefit. Innovation is constantly improving the lives of people all across the globe, transforming our homes, schools, businesses, and daily lives. From digital payments helping to make finance more accessible, to the cloud and the Internet of Things (IoT) boosting efficiency everywhere from farms to factories, to artificial intelligence solving problems from auto safety to disease diagnosis — the world’s progress is grounded in innovation.
We’re at the beginning of a multidecade journey of massive disruption and we believe investors need to be positioned to harness the tech driving this innovation.
A long runway for growth
But the tech sector’s strong recent performance has some investors asking, “are we too late?”. In our view, the answer is an emphatic “no” and the innovation trend continues to offer a long-term secular opportunity. Though areas of the market currently have elevated valuations and the growth curves for some innovations may have accelerated or even plateaued, we think there is still a long runway for growth ahead.
Tech innovations like digital payments, AI, the IoT, the cloud, and digital transformation are still early stage, in our view, and are increasingly disrupting every segment of the economy, extending far beyond technology and health care. In fact, we believe traditional exposures to technology are too focused on big tech names and lack the research depth to capture the full investment opportunity in the years to come. As the world rapidly changes, we think investors’ tech exposure needs to evolve along with it.
Digging deeper to find hidden opportunities
In the video above, we explored the technologies behind the coffee bean, highlighting innovations from farmers harnessing cutting-edge sensors in their soil to power new data insights from AI to consumers using advanced digital payment methods to purchase a cup of coffee. Innovation has far-reaching impacts on consumers, businesses, and society as it creates opportunities for everything from the raw materials up through the supply chain to a technology’s numerous end markets.
We believe the key to accessing these opportunities is to take a targeted, active approach to identifying the winners and losers of long-term structural innovation trends across industries. We harness our deep and broad research resources to discover the many underlying opportunities hidden beneath the surface of well-known tech names. In our view, this helps avoid trying to pick the winners of a megatrend and instead looks to invest in the many winners across the supply chain. As supply chains become more and more integrated, particularly in Asia, companies have many different end markets. For instance, microprocessors used to sell into one industry, but they now fuel countless other sectors.
Innovation beyond the headlines
Critically, we think many investors are missing the full opportunity of the firms powering these enduring themes. Below are three examples of areas where some investors worry the market is overly exuberant, but that we think continue to have robust growth opportunities beyond the headlines.
The hidden opportunity
While the market focuses on the automakers, we’re more interested in the massive demand they’re driving for the numerous components these cars will require (Figure 1). For example, by 2030, electronics are likely to be 45% of total car cost.4 Regardless of who wins the electric vehicle war, we believe the companies supplying the picks and shovels of innovation — the companies mining nickel for batteries, the advanced chips manufacturers, and the AI firms, among many others — will continue to have a growing market for their products, including broader use cases beyond EVs.
The hidden opportunity
Even the headline trend of automation increasing productivity has numerous underlying themes, including machine vision, 5G, the cloud, and AI to capture, transmit, store, and analyze an exploding amount of data. These opportunities are powered by many small companies across the globe, requiring investors to have substantial regional and industry expertise.
But automation is also increasingly enhancing decision making, adding convenience and efficiency to myriad consumers and businesses. Entertainment companies use AI to improve customer content choices, insurance firms automate their customer service, and advertisers use machine learning to automate customer engagement decisions, among many other examples. In fact, AI has the potential to add up to US$5.8 trillion in yearly value to 19 industries (Figure 2).5
The hidden opportunity
The COVID-19 health crisis revealed that there is still a long runway from growth in numerous parts of the e-commerce theme. Areas like grocery delivery, digital payments (Figure 3), and sustainable packaging are still very early in their growth curves. For example, grocery delivery grew by 43% in 2020 but still has less than 50% market penetration.6 This growth was powered by demand that was orders of magnitude higher than companies had seen prior to the pandemic, shifting up the growth curve and offering them the scale to invest in this area. In some countries, like China, the community group buying model is expanding the market to previously untapped populations with community leaders buying in bulk and then distributing goods to the community.7 In addition, the companies enabling the cloud and digital transformation continue to have significant room to grow as e-commerce reaches new sectors and segments of society.
In our view, the key to investing in the long-term secular themes driving tech and innovation is to look beyond the hype and the news flows. We cannot stress enough the need to dig deeper into fundamentals and understand “the trends beyond the trends” that can sustain growth for the long term. We think investors need the depth and breadth of research to harness the opportunities innovation creates beyond the traditional “innovative” sectors.
Tech progress has marched on through the pandemic, trade wars, and economic cycles. This pervasive innovation continues to disrupt industries and drive growth while, in our view, making the world a safer, more efficient, increasingly equitable, and overall better place. We believe the question should not be “Have we missed it?,” but rather “What’s next in innovation?” and “How do we capture that growth?.”
about the authors
Anita Killian, CFA
Yash has over 10 years’ experience covering the technology sector, specializing in the software and internet sectors.
Bruce has over 25 years’ investment experience in the technology and business service sectors, with specialisms in the analysis of transaction and information processing and information technology professional services.
Michael has over 20 years’ experience in following industries characterized by rapid change and disruption. He is also the head of Wellington’s Investment Science Group.
Brian has been covering the technology sector for over 10 years and has particular focus on internet and video game software companies, undertaking research and managing investments across both public and private equities.
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