The role of equities is changing in scheme's portfolios. Goodhart Partners' Alan Barlett, Hymans Robertson's Andy Green, JLT's Kieran Harkin, KPMG's Jon Exley and M&G's Aled Smith discuss where value in the asset class can be found.
Alan Bartlett: It is common to talk about technology as something new and therefore not something that people needed to think about in the past. But that is not true. Technology has always been important. It was important in the 1860s when Carnegie found a way to make stronger railway lines more cheaply than the competition. Companies like Samsung are well positioned because they do not necessarily need to develop the winning technologies. They have the scale to buy the technology from other firms, like Carnegie did. It is the same thing, whether you are talking about the railway industry in the 19th century, or smartphones in the 21st century.
Jon Exley: But surely the pace at which things become redundant is accelerating? Today’s technology does not last as long as yesterday’s. When you are putting railway tracks down, if the company owns the railway tracks it has got an asset that is going to be there and that you can value. Is it not harder now to value the intellectual property rights of companies as being the main asset, and if this can become redundant almost overnight, does that not make it so much more difficult today?
Andy Green: And that the uncertainty over the longevity or persistence of return from making a capital investment puts increasing pressure on companies. Not in all industries, but many companies now have now got a higher risk associated with capital investment. If you are Samsung or Apple thinking you are going to invest in developing something, but you may only get two or three years’ return on that money, does that change the way in which you assess about capital investment and actually hold back on capital investment projects? Which is actually part of the problem that we have all said exists: companies hanging on to money.
Aled Smith: Computers are getting faster and companies are competing on smaller and smaller pieces. That is not really a competitive edge any more, what we focus on is culture and decision-making of companies. And if you can understand what a company is really good at and how it is making decisions and deploying capital, you might find an opportunity for a company that is reviewing itself, but that is not in the price.
We look for opportunities where companies are renewing and you get that optionality.
Kieran Harkin: There was a point made earlier around pace and protection, and that is massive in terms of its importance in the tech sector, which effectively is now all sectors, if you like. And probably from a fund managers’ perspective it is quite an interesting question to ask about the value chain, as has been highlighted. So the monetisation of a tech stock is the challenge we heard about years ago; how does Facebook make money? The world has moved on now, you can have technology driving so much change in the industry that from a fund manager perspective your investment may not be in the stock itself, it may be back in the value chain.
Smith: One has to look at the end customer, so the kind of thing we do is we no longer go to fund manager conferences or broker conferences, say, on the healthcare industry. I used to do that maybe five years ago.
Today I would rather go and spend two days in a hospital and talk to people about what is actually changing at the sharp end of patient care, and the pressures of saving money in a hospital or delivering services to the patient, and who are the companies who are able to deliver that.
Ultimately that boils down to something companies have always had, which is if you have got a great culture or great leadership, then you can take advantage of the changes that are available to you to adapt your business model. I think it is happening faster and as these new companies are springing up, because there are new skills in software and analytics that traditional companies do not have. That seems to be the number one challenge facing the CEOs we talk to.
Bartlett: I completely agree with the intellectual capital point you made and it is a very hard thing for people to value. If you look at somewhere like Japan, you have a market that spent 20 years overspending on research and development to keep people in gainful employment.
It is just an asset that will be amortised over time. It is incredibly difficult to value, and you do not want to pay for it, but as an option on the future durability of earnings it is hugely underestimated by people with a US-centric way of looking at the world: you spend as little as possible on research and development in order to have the highest return on capital.
Actually, it is the other way round if you want to create a long duration asset.
