Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
As regular readers know, Helicon Thoughts comprise ‘white papers’ or ‘thought pieces’ that we write on an ad-hoc basis, discussing longer-term structural themes and how investors can best seek to position for these. Typically the stocks cited are holdings within the Helicon Fund, Heptagon Capital’s equity hedge fund that was launched in April 2011. Over the course of the last year, we published eight editions of Helicon Thoughts; and with 2013 now commencing, we thought it appropriate to consider the ongoing relevance of the most important of these themes.
Several of the trends we have discussed (in particular, the growing presence of robots, 3D-printers and molecular diagnostics – all at increasingly reasonable price levels) have the potential to change the very way in which we live and do business for many years to come. Meanwhile other topics (such as the deluge of data, the rising incidence of diabetes and global power shortages) will remain highly significant, also creating a number of clear investment opportunities.
It has been encouraging to see that investing in these themes delivered generally positive investment returns over 2012, a trend that we are confident will be replicated going forward. Moreover, we will continue to research further topics of potential importance (and corresponding investment strategies), while other subjects on which we have also written in the past may result in holdings within the Fund over time too. A brief summary of our key themes and why we anticipate that their importance will only continue to grow over time follows –
The robot revolution
The robots are coming. Both in the workplace and the home, their presence will soon become ubiquitous. Growth will be exponential. No country or company will be immune from this inexorable trend. These comments are neither the stuff of science fiction nor are they bold hyperbole, but indicative of what constitutes a rapidly developing and empirically observed phenomenon. Already, the global robotics market is worth more than $20bn and there are over 1.1m robots in service, equivalent to one for every 6,000 people. Adoption looks set only to grow given not only ageing demographics in the developed world, but also with increasing competition from low-cost producing countries in the emerging world.
Their advantages can be summarised by two words – increased productivity – and this manifests itself in a range of different ways, namely: reduced operating costs (labour is substituted by capital, and this capital can be deployed anywhere), superior product quality, enhanced manufacturing flexibility and better workplace health and safety (robots don’t get ill or distracted; nor do they strike, take days off or demand higher wages). Many companies have already begun to see the clear gains that the introduction of intelligent robots into the workplace can bring. Within the car industry, around 60% of the manufacturing process in now automated, with robots involved in the welding, gluing, painting and final assembly processes. Correspondingly, some car manufacturers now produce twice as many cars as they did a decade ago.
Some 50% of industrial robots in existence can be found in Asia, with around 30% in Japan alone. South Korea is the next most popular market for robots, followed by Germany. By industry, most units at present can be found in the automotive and electronics markets (perhaps not surprising given the countries where their proliferation is highest), which together account for around 40% of all robots in service.
Correspondingly, the largest listed players within the field are Japanese and German businesses such as Fanuc and Yaskawa in the former and Duerr and KUKA in the latter. Duerr has been our preferred investment in the field, with the business a worldwide leader in 90% of its product portfolio, which supplies automobile manufacturers with robotic equipment. In 2012, Duerr gained 98%, while the other three stocks added at least 25% each over this time period. On a five-year basis, Duerr’s annualised returns have exceeded 30%.
Coming soon to a printer near you
A major change to how goods are produced is on its way. The nascent 3D-printing industry is already worth over $1.3bn and soon printers in the home, the workplace or the factory that are able to produce explicitly customised and differentiated products will be commonplace. 3D-printing has the potential to reconcile successfully both the speed and efficiency of mass production with the flexibility and variety of customisation. In theory, as printers grow in number, reliability and complexity, it should be as cheap to create single items as it is to produce thousands.
The concept is very simple. Imagine you need a new part for your washing machine. Rather than waiting for it to arrive from the manufacturer or worrying about whether it has been discontinued, this is what you do: first, you call up the image on your computer screen (accessed via the manufacturer’s website or some sort of other image library). If you wish, you have the ability to amend it, say, by changing the colour. Once done with this stage, just press print. The printing machine nearby activates and then the part gradually begins to be built. Typically, thin layers of material (plastic/ metal dust etc.) are deposited from a nozzle and then solidified via tiny amounts of glue (or another substance – sometimes laser, ultra violet or heat) from a tightly focused beam. The spare part is therefore created gradually, in several layers, hence why 3D-printing is often referred to as additive manufacturing. Small items such as this may be produced in the home; larger items in offices or factories. Companies including GE and Boeing have already incorporated the production technology into their businesses, while there is also growing popularity among dentists and doctors, for whose patients, the creation of a uniquely personalised replacement tooth or limb is logically appealing.
Wohlers Associates, an American consultancy, estimates that there are around five million 3D-printers in existence, with the industry currently worth $1.3bn. By end-market, the consumer industry accounts for 24% of demand, followed by the automobile (17%) and healthcare markets (14%). Most items produced by such printers are currently used either as functional models or visual aids, although Wohlers estimates that around 15% of goods manufactured are used in direct part production. Growth prospects look attractive and as with computing a generation ago, both the cost and the efficiency of 3D-printers should improve. According to various sources, the cost of a basic 3D-printer is now less than that of 2D-laser printer twenty years ago. Some basic models now retail for around only $1,000.
Within the 3D-printer market, two businesses dominate the industry: 3D Systems and Stratasys. Both have delivered at least 25% annualised returns for investors over the last five years, while in 2012 the two companies saw their respective market capitalisations rise by more than 100%. 3D Systems is ranked market leader by revenues and retails machines from $1,300-950,000. Its customers include the likes of Ford, GE, Nike, Apple, Airbus, Mercedes and Samsung. Stratasys has been producing 3D-printers since 1988 and has sold over 20,000 units since then, ranging in price from $1,500-380,000. 3DS and Stratasys both continue to expand via acquisitions.
Reinventing healthcare and the coming age of personalised medicine
The quest to eliminate disease, expand human potential and extend life has been a preoccupation for scientists, philosophers and alchemists throughout the ages. Now, with the emergence of genetic sequencing and the subsequent power to test genes, the ability to manage more accurately not only patients’ illnesses but also to test their predisposition to illness is increasingly becoming a reality for many, especially as the costs of doing so continue to fall. The age of personalised medicine, where healthcare is essentially customised with decisions and practices being tailored to individual patients by use of genetic and other information could soon be upon us.
It is only in more recent times that the technology for sequencing has evolved to such a level to make it economic. Put another way, just a decade ago, it cost around $80m to sequence a human genome, based on data from the US body, the National Human Genome Research Institute (NHGRI). It was hence the preserve of specialised academic and government research centres. Even five years ago, the cost remained exorbitantly high, at close to $9m. By contrast, today the cost is only $1000. Data throughput and the cost of DNA sequencing are currently improving by a factor of 10 every 18 months. As a result, a sequencing machine today would cost a surgery or hospital as little as $50,000, fit comfortably onto a desk, and be able to read 10m letters of genetic code with a high degree of accuracy in only two hours. As of the end of last year, around 30,000 genomes had been sequenced, according to the NHGRI. By 2014 it estimates that the figure could be 1m.
Based on the information derivable from genetic screening and testing, future medical practice may become substantially more proactive, in contrast to current medical practice, which tends to be reactive, with treatment/ medication commencing after the concerning signs and symptoms appear. In particular, such an approach can help in four key respects: identifying people with predispositions for a particular disease; detecting whether a person has a disease, often at earlier stages of the illness than was previously possible; ascertaining the effectiveness of a particular drug therapy for an individual; and, describing the precise nature of a disease including its condition severity. Genome sequencing and its corollary, personalised medicine, are inherently efficient. Some studies suggest that the total cost of ineffective drugs and their side-effects, resulting hospital admissions, lost productivity and premature death cost the US alone at least $100bn annually.
Ilumina and Life Technologies are in the vanguard with regard to producing tools for sequencing DNA. Illumina’s MiSeq entry-level product retails for a list price of $125,000, while Life’s Ion Proton machine can be purchased from $50,000. Both companies have substantial patent portfolios and healthy order books. Indicative of the importance many in the healthcare industry attach to the potential for genetic sequencing, Roche offered $5.7bn for Ilumina last year (a 30% premium to its pre-bid price) and although the deal fell through, it seems likely that Ilumina may receive other offers in the future. During 2012, Illumina and Life Technolgies both saw rises of more than 25% in the share prices.
The data deluge
Data is ubiquitous, whether we realise it or not. Demand trends look irrepressible and there seems no reason to expect this phenomenon to reverse any time soon. IBM estimates that 2.5 quintillion (i.e. 2.5 x 10 to the power of 18) bytes of new data come into existence every day. By way of easier explanation, consider that every minute of the day, more than 200m emails are sent, over 2m search queries are made on Google, greater than 600,000 pieces of content are shared on Facebook and some 50,000 Apps are downloaded globally. It is not just consumers, however, that are being caught up in the data deluge, but businesses too. By way of example, take Wal-Mart, the world’s largest retailer: it handles over 1m customer transactions every hour. These are imported into its databases, which are estimated to contain over 2.5 petabytes of data, equivalent to approximately 50m filing cabinets worth of data in the ‘real’ world.
For Wal-Mart, or indeed any other organisation, irrespective of size, analysing this data can help drive optimisation – from supply chains to customer relationships – in order to establish competitive advantages. A recent McKinsey study found that retailers analysing their data could have the potential to increase their operating margins by over 50%. Elsewhere in the report, McKinsey calculated that the US government could generate up to $300bn of annualised cost savings through the analysis of healthcare data, while most European healthcare administrations could make reductions in the region of $100-150bn annually.
Two clear trends are at work here: first, the growth of data and second, the need to store, secure, retrieve and analyse the data in question. Cisco expects overall internet traffic to quadruple over the next four years and for growth in data to run at an annualised rate of over 30% through to 2015. The spread (and speed) of broadband, mobile, digitisation, social media and the cloud constitute the key drivers, underpinned by improvements in processing power (Moore’s Law) and storage costs (which continue to fall – by some 30% in the last five years according to some estimates).
Any data strategy will likely necessitate an expansion in services to move and store data. While around 80% of corporate data centres are currently in-house, these are typically inefficient (with either too much or too little spare space, implying wasted operational costs or increased future capital expenditure requirements). Data centres enable customers to warehouse and easily scale up their data strategies and such centres also bring the benefit of carrier-neutrality, allowing clients to transfer their data quickly and via a range of different service providers. Leading players within the field include Telecity and Equinix, who have delivered annualised returns of 27% and 23% respectively over the last five years and gains of 21% and 103% in 2012. The industry has structurally high entry barriers, resulting in high recurring revenue streams and correspondingly attractive margins for the businesses present.
Fat profit potential: bulging bellies and growing obesity
It is, put simply, increasingly easy to get fat: food (particularly the ‘wrong’ sorts) is abundant and cheap and lifestyles are becoming progressively more sedentary. The average calories available per person per day have been increasing in the developed world since the early 1970s. The typical American now consumes 3,800 calories per day (Europe is not far behind, at just under 3,400) against a government recommendation of just 2,000. Forty years ago, fewer than 20% of these calories were eaten outside of the home, relative to more than 40% now. Food eaten on-the-go or in restaurants, in general, tends to contain more saturated fat, less fibre, more cholesterol and significantly more calories than homemade food. An ‘Extra Value Meal’ from McDonalds comprising a quarter-pounder with cheese, a super-size portion of fries and a super-size soft drink, for example, contains 1,550 calories, over 75% of one’s recommended daily allowance.
Obesity unsurprisingly increases the likelihood of various illnesses including heart disease (high blood pressure, cholesterol), type-2 diabetes, certain forms of cancer and osteoarthritis, as well as having a harmful impact on anxiety, stress and fertility levels. The UK’s NHS estimates that obese adults over the age of forty can expect to see their life expectancy reduced by between six and seven years. Beyond the physical (and social) cost, there is also a distinct economic cost attached to obesity. Methods of calculation vary, but the National Audit Office in the UK arrives at a figure of £4.2bn ($6.7bn) to the NHS and a number of at least £20bn ($32bn) to the wider economy in terms of lost productivity. Data in Obesity Journal, a US academic publication, put the figures as substantially higher for the US, with an estimate of $61bn in terms of direct medical cost and $117bn relating to indirect economic losses
The World Bank calculates that obese individuals spend 36% more on healthcare and 21% more on medication than either daily smokers or heavy drinkers, implying that there is plenty of scope for corporates involved in this area to ‘get fat’ on the profits. One of the clearest ways in which obesity manifests itself is via type-2 (self-inflicted, through dietary choices, as opposed to hereditary) diabetes. The World Health Organisation shows that excess body fat underlies 64% of cases of diabetes in men and 77% in women, and the number of people with diabetes has more than doubled in the last ten years, to 366m. Danish-listed Novo Nordisk is the market-leader in the provision of insulin for diabetes treatment, with a 24% share of the market by value. Its business has high operating margins and is generating significant levels of free cashflow. Sanofi is the second largest player in the field. Novo estimates that by 2050, 522m people globally (a 40% increase from current levels) will have diabetes. In 2012, Novo Nordisk gained 39%, while Sanofi added 26%.
Power shortages: what happens when the lights go out?
There is a structural shortage of power globally and the gap between demand and supply is set to widen in coming years. Over the ten years to 2008, electricity consumption globally has grown by 3.8% p.a. according to the International Energy Agency (IEA), but the rate of growth has been significantly faster in non-OECD countries (7.4% p.a.) than has been the case in more developed, OECD countries (1.0% p.a.). The differential can be explained by the fact that, put simply, as an economy grows, so does demand for energy. This is a function not only of industrialisation, but also increasing consumption patterns with the broader population acquiring ‘basic’ products such as refrigerators and televisions for the first time. Analysis from Oxford Economics suggests that in countries where GDP is growing at more than 5% p.a., demand for power increasing at a logarithmic rate. More recent data is also supportive of the demand arguments.
The much more contentious part of the equation, however, is supply. Power is a utility without which people, businesses and economies cannot operate; it is valued most when it is absent, or put another way, the opportunity cost of not having power is significant. Evidence abounds to support this contention. According to a recent study by the United Nations, the five worst-affected countries for power outages are (in order): Bangladesh, Nepal, Kosovo, Albania and Pakistan. Sub-Saharan
Africa also appears heavily within the list, and Congo, Kenya, Nigeria and Uganda all feature in the UN’s top-twenty most
affected. As recently as May last year, a power outage in Karachi, Pakistan left 18m people without electricity for over three hours. The Beaconhouse Institute of Public Policy, a local think-tank, calculates that Pakistan’s power shortages in
2008 cost the country 2% of its GDP, or over $1bn in lost export earnings. A different study, cited in a recent New York
Times article, suggested that for Uganda, the cost of power and fuel shortages was equivalent to as much as 5% of its GDP.
For many developing economies, however, the ability to purchase new infrastructure is simply not possible and rental is often the favoured option, particularly given opportunity cost considerations. UK-listed Aggreko dominates the global
energy rental market. Following the acquisition of General Electrics’ energy rentals business in 2006 combined with
healthy organic growth, Aggreko is now six times the size of its nearest competitor (Caterpillar) and serves customers in over 100 countries globally. Its market leadership looks set to endure owing to its scale, expertise in distribution and
logistics and its strong end-user relationships. Aggreko lost 13% in 2012, but has delivered annualised returns of 28% over the last five years.
Alexander Gunz, Fund Manager, Heptagon Capital
The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document.
The document is protected by copyright. The use of any trademarks and logos displayed in the document without Heptagon Capital's prior written consent is strictly prohibited. Information in the document must not be published or redistributed without Heptagon Capital's prior written consent.
Heptagon Capital LLP, 63 Brook Street, Mayfair, London W1K 4HS
tel +44 20 7070 1800
fax +44 20 7070 1881
email [email protected]
Partnership No: OC307355 Registered in England and Wales Authorised & Regulated by the Financial Conduct Authority
Get The Updates
Separated they live in Bookmarks right at the coast of the famous Semantics, large language ocean Separated they live in Bookmarks right