Page 10 - DIY Investor Magazine | Issue 32

TECHNOLOGY ENABLERS – ’PICKS & SHOVELS’ IN THE TECHNOLOGY GOLD RUSH
Ross Teverson, Colin Croft, and Matthew Pigott, portfolio managers of Jupiter Emerging
& Frontier Income PLC, argue that investors may be better off looking beyond the obvious names in their search for those companies that are best positioned to drive, and to benefit from, the major technological changes playing over the coming years.
A LOT TO BE EXCITED ABOUT (& A CAUTIONARY TALE)
Digital disruption, ubiquitous high-speed telecommunications, migration to the cloud, electric vehicles, and the promise
of autonomous driving – as consumers of rapidly evolving products and services, there is much to be excited about.
From a sustainability perspective, the potential that these new technologies present for greater productivity with lower environmental impact is also considerable. And for investors this pace of change creates a multitude of investment opportunities.
However, it also brings with it risks, including the risk of failing to identify the ‘winners’ from these developments.
This risk is amplified by the very high prices that investors are
‘FOR INVESTORS THIS PACE OF CHANGE CREATES A MULTITUDE OF INVESTMENT OPPORTUNITIES’
currently paying for shares in those companies perceived to be the most obvious beneficiaries of technological change.
At the turn of the millennium, investors were understandably excited about 3G telecommunications. Mobile phones were becoming more affordable and 3G promised to deliver fast, reliable internet access straight into the palms of consumers.
Financial analysts were forecasting widespread take-up of new handsets and services and this excitement helped to drive the valuations of ‘obvious’ beneficiaries, such as Vodafone, Nokia, and RIM (makers of the BlackBerry), to extremes.
Today, 22 years later, investors who bought Vodafone at its peak in March 2000 have experienced a total return of -20% (dividends have helped partially cushion the blow of a -79% fall
1 in the share price) .
However, this dismal return makes Vodafone the best returning stock of the three by a considerable margin. It is not that analysts overestimated the rate at which consumers would embrace new technologies – if anything, analysts’ forecasts proved too conservative. So, what went wrong?
For one, analysts underestimated the level of competition and disruption in a market where so many players were chasing the same opportunities. Investors had bought into a narrative at the expense of ignoring the valuation they were paying to get exposure to that story.
Of course, a handful of stocks did go on to become exceptional long-term performers, but the experience of Vodafone, Nokia and RIM should serve as a cautionary tale, and prompt investors to consider whether there are parallels to be drawn with some of the high valuations being paid for certain stocks in today’s market.
It also begs the question as to whether there may be another way to get exposure to technological change with a higher degree of confidence that we, as investors, will actually profit from it.
Our preferred method is through investing in ‘technology enablers’: companies providing some of the key components and services that make new technologies possible.
1 Source: Bloomberg, to 21.01.2022
DIY Investor Magazine · Feb 2022 10