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Three big ideas to identify the next big winner

There are thousands of investors tirelessly scanning the global equity markets to find the next Apple, Alphabet, Amazon, Microsoft or Tesla. They are part of an unofficial ‘gold rush’ aimed at uncovering the next big winner. To stake your claim requires expert knowledge of financial markets and a clear understanding of the trends that are most likely to drive investment returns over the next decade. But sometimes the opportunities are hiding where others aren’t looking. 

These were some of the key messages delivered during a panel discussion at the recently held Allan Gray Investment Summit, where global fund managers came together to share big ideas that will not only guide investors in managing risk in today’s global investment universe, but also impact on investors’ returns in the digital age. Below are three themes that panellists suggested would shape the global investment universe in time to come.  

1.       Technology delivers in unexpected ways.  

The panellists agreed that openness and transparency would be increasingly important in their share selection processes, as investors demand more from firms in responding to environmental, social and governance (ESG) concerns. 

Graeme Forster, a portfolio manager at Orbis, offered a contrarian perspective on an unexpected beneficiary: commodity producers and traders.  

 “Even the most mundane businesses can also produce exciting investment opportunities,” said Forster. “Commodities are a good example. We believe greater scrutiny on how and where products are sourced will lead to both structurally higher commodity prices and greater price differentiation.”  

Forster noted that there are a number of attractively valued companies in the commodity space that are poised to benefit from recent trends and the latest technologies. 

“An exciting recent development is that firms are applying new technologies such as blockchain to improve transparency across complex supply chains, with huge benefits to society.”  

He added that asset managers have to pay close attention to how firms apply emerging technologies, because the positive impact of these technologies is not always in plain view. Returning to the blockchain example, Forster commented on a food manufacturer that had achieved significant operational efficiencies by integrating this technology into its track-and-trace capabilities. The firm can now trace any disruption to its supply chain, back and forth, from suppliers, to manufacturing plants, to distribution locations, to retail outlets and on to the final customer. 

2.       Consider ‘old world’ industries through a technology lens.  

The Tesla versus Toyota (or in fact the rest of the traditional auto manufacturing industry) debate surfaced as an example of why investors may need to adjust the way they think. At December 2020, Tesla’s market capitalisation exceeded the total market capitalisation of the world’s nine largest automobile manufacturers combined, leaving the lay investor wondering what was going on. Tesla was way behind when measured on production output, for example, not to mention global reach. 

“The problem, it seems, is that we are trying to value new technology-focused businesses using the same metrics that worked when assessing ‘old world’ or traditional companies engaged in similar activities. The trick is to not obsess over spot valuations and rather see Tesla for what it really is. It is not a vanilla electric vehicle manufacturer; but a unique hybrid combination of a software company and, perhaps a decade from today, an energy storage business,” explained Tim Garratt from Baillie Gifford.   

So, could Tesla be a future Apple of the utilities industry?  

“Here is a company, like many others we admire, that is prepared to depress short-term earnings in in order to double down on the long-term opportunity,” said Garratt. 

He added that investors with a 10-year view on the company will be holding on for it to reach annual production of around 10 million units, and then soak up the margin growth on offer from the resulting returns to scale.  

3.       Don’t throw the China baby out with the bath water.  

China was top of mind among the investment experts following a range of business unfriendly crackdowns by the global superpower. Two recent examples of government’s meddling include the introduction of time restrictions on youth participation in online gaming, and a decision to ban local Bitcoin mining operators.  

But Philip Saunders, Co-head of Global Multi-Asset Growth at Ninety One, said that investors did not fully understand the Chinese political system, urging them to assess recent decisions against the country’s history. “The Chinese government believes it has a responsibility to divide the surplus among its population; and the recent changes are very consistent with that,” he said, adding that companies such as Alibaba and Tencent offered incredible long-term prospects.  

An approach that will prove useful to those who can stomach the political uncertainty, is to build up positions in these shares while the prices are depressed. “Assess China-based businesses from a China perspective,” said Saunders.  

The investment community is not alone in reassessing their China strategies, with affected businesses doing what they can to remain relevant. “The Bitcoin mining community has responded by initiating five-year plans to migrate to cleaner energy, real blue-sky stuff; and there are all sorts of interesting dynamics at play that we are watching closely,” concluded Forster. 

Watch the presentation on how to invest in a changing world with insights from global fund managers, as debuted at the Allan Gray Investment Summit, here: https://www.investmentsummit.co.za/#the-world-is-changing-how-to-invest 

Or, access a range of other thought-provoking content presented at the Allan Gray Investment Summit, here: https://www.investmentsummit.co.za/ 







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