In an increasingly digital world, the ability to innovate carries an ever-greater premium. For lasting success, companies must marry innovation with faultless execution and a laser focus on customers for lasting success.
Brilliant companies combine their understanding of what customers will want in the future, with innovation and technology to meet those needs and desires before their rivals.
This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.
A journey of discography
I grew up in the era of music singles and LPs, then cassettes arrived along with mix-tapes. The digital music era dawned in the late 1980s with CDs, when surely, it seemed music media had become as good as it was going to get.
But then we got the first iPod in 2001 and MP3s were popular.
Of course, streaming then turned up, and now Spotify and others dominate the market. Physical recorded music is a rarity and Apple discontinued the iPod as its music services are on its other products.
Although there were winners from these changes in technology, there were losers too. Investor Guy Hands famously spent and lost billions of pounds buying record company EMI for his private equity funds.
Spotify on the other hand is now worth around $25bn – an illustration of capitalism’s invisible hand redistributing value.
No one will ever win Mastermind after choosing ‘the current state of Technology’ as their specialist subject. You simply can’t nail the topic down, for change is technology’s only true constant.
Of course, music is hardly the largest technological change. Major early technological events included making fire, growing crops to harvest, and persuading a horse to let someone sit on its back.
However, we’ve gone further. Humans have made metals, created cities, learned to fly, stood on the moon and invented telephones that can share videos of kittens.
You don’t have to buy technology stocks to benefit from it.
It’s easy to think that to benefit from technology, you need to buy shares in a Silicon Valley giant. But there are companies doing smart things with tech in lots of different industries.
Here are three examples from HL Select’s funds.
From paper pushing to data delights
In the UK, RELX plc is a FTSE 100 stalwart, once known as Reed International. Long gone are the papers and packaging that they once manufactured.
These days RELX's stock in trade is data. Increasingly big data.
Scientific and medical journals are reliable sellers to universities, hospitals, and research institutes around the world. But these days they come with databases and analytics to help researchers leverage the core journal content in their work.
RELX sell risk-based data to industry and insurers to help them manage their risks, while lawyers can mine the company’s Lexis Nexis legal database.
Print-based products are now a rarity for the group and their data skills are the driver behind the growth of the business.
Revolutions per minute in the car industry
There’s a revolution going on in the car industry as the switch to electric gathers pace. I don’t know which car maker will end up on top at the end of it. But you don’t necessarily need to.
Aptiv plc is a US listed company that provides multiple electric vehicle manufacturers with components ranging from safety systems to connectivity and self-driving capabilities.
Aptiv talks of software-defined vehicles – cars where the features and functions are primarily enabled by software, not mechanics.
By supplying many manufacturers, Aptiv is able to potentially benefit, whoever comes out on top.
Originally part of Delphi, the world’s largest auto-parts distributor, Aptiv was spun-off to create a listed company focused on the growth segments of the auto industry. This way it would be able to operate without the legacy issues that manufacturers of increasingly obsolete items like fuel tanks and exhausts will face.
Under rat-ed?
From roads to rodents. Rentokil, scourge of rats, roaches and other pests is another example.
For years they have been bolting-on smaller pest control and hygiene businesses to their own, much larger operations, enhancing margins and earnings. Now they face the prospect of extracting synergies from their much larger than normal acquisition of Terminix Inc in the US.
Beneath the radar though there’s another story going on, which is the increasing penetration of technology into how they go about their daily operations.
Rentokil are rolling out new technology that uses miniature cameras and AI analytic systems to identify pests at client sites and arrange for eradication. It could be a powerful differentiator between their service offering and that of the smaller players.
Why technology matters
My key takeaway is that business changes each and every day. And innovation can protect companies’ rights to retain their customers.
For the HL Select funds, we look out for the innovators because we seek the companies that will still be thriving in years to come. You can find each of the companies I’ve mentioned in one or more of our Select funds.
We also provide our investors with a rationale for all of our portfolio holdings so you can understand why we back each of the companies we hold in the funds.
Steve Clayton is a Fund Manager of the HL Select range of funds. The information provided is the fund manager’s view and not an investment recommendation.
The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.
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