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.
The 30-second summary: Thematic investing is a core part of our investment process at Heptagon. This is our sixth annual review of the key long-term secular trends that we expect to grow in importance over time. The digitisation and subsequent automation of much of the world underpin almost all other current developments. Ramifications will be felt everywhere, across most conventional industries including the healthcare, financial and transportation sectors. Investors can access a range of leading businesses exposed to these trends via two of our UCITS funds, the Heptagon Future Trends Equity Fund and the Helicon Global Equity Fund.
Our 2016 outlook note began with a quotation from Charles Darwin, namely that “it is not the strongest of species that survive, nor the most intelligent, but the ones that are most responsive to change.” It remains as valid as ever as we commence 2017, particularly since, an S&P 500 company is, on average, now replaced every two weeks. However, we thought it fitting also to consider other suitable quotations that capture the essence of why thematic investing in general and focusing on future trends in particular is appropriate.
Two stand out. The first is from Jeff Bezos, founder of Amazon. He says that “you have to be misunderstood if you are willing to innovate.” Put another way, the future is not linear; many innovations are not fully appreciated (by business, consumers, investors) on launch and take time to gain mass acceptance or adoption. In a similar vein, David Bowie famously remarked that “the future belongs to those who can hear it coming.” One interpretation of this is that particularly in a world where sustained economic performance remains elusive, we believe it behoves investors to consider the merits of future trends; they offer the potential of growth in a low-growth world.
Throughout, technology is an enabling factor; or, as Satya Nadella, Chief Executive of Microsoft puts it, “businesses will not just use digital technologies; they will become digital companies.” We have written the following before, but it deserves reiteration: whatever can be digitised, automated and disintermediated will be. Looking into 2017 and beyond, we feel it meaningful to add a fourth element to this maxim; namely, whatever can be made more intelligent will be. Artificial intelligence, a term which is appearing with increasing regularity (and about which we wrote in detail in April 2016), can be thought of as the fourth age of computing, superseding the mainframe, the PC and the mobile internet. All these trends become necessarily more powerful when they converge and overlap.
During 2016, we published research on five new topics – the sharing economy, artificial intelligence, virtual reality, implantable technologies and synthetic biology. Additionally, we attended conferences and visited companies in locations as diverse as New York and Naas (rural Ireland) in order to learn more about the future. However, in recognition of both Darwin’s opening observation and the practical constraints of space, we cannot include all of our theme-based research in this outlook piece. Below follows a summary of a number of the key themes about which we currently have highest conviction. Interested readers should consult our Future Trends, Volume III publication also released this January for more information on all of these topics and more.
The power of mobile broadband
Mobile broadband is the fastest-growing information and communications technology service in the history of the world. This time next year, some 3.6bn people will own internet-enabled phones according to McKinsey. In other words, we will be halfway to connecting everyone on earth, providing them with a super-computer in their pocket. Wind the clock back to as recently as 2010. Then, the latest iPhone model in the market (the iPhone 4) contained as much power as the world’s fastest super-computer of 25 years’ prior (the Cray-2). Now, the current iteration of the iPhone (the iPhone 7) contains four-times as much computing power as the 2010 model. Technology continues to evolve at a rapid pace. Simultaneously costs are falling; with smartphones retailing for as little as $50, connecting the remainder of the world should no longer be thought of as an impossibility.
With such power residing in a device that fits into the size of one’s palm, the potential is enormous. In the US alone, smartphones are checked 8bn times a day, equivalent to 46 times per day per person (according to the GSM Association). The average user will spend a remarkable four hours a day on his/her phone. Clearly mobile handsets are not the only medium for accessing the Internet, perhaps just the most popular one. The following statistics (courtesy primarily from the website Excelacom) are equally as outstanding: every minute, 150m emails and 20.8m WhatsApp messages are sent; 2.4m searches are made on Google, generating $960,000 worth of advertising revenues; 5,100 items are purchased on Amazon and some $200,000 spent; 2.8m views occur on YouTube; there are 700,000 Facebook log-ins; and, 115,000 files are saved into Dropbox. All the above equates to some 225,000 GB of data being transferred across the Internet.
Crucially, within this data deluge, everything that gets created needs to be stored. Some 60% of stored data currently resides in the cloud (based on analysis by McKinsey) given the flexibility and cost benefits this affords. There was a 30% growth in the market for cloud computing during 2015 (the last year for which full detail was available), yet the market should continue to expand at least at this rate through to the end of the decade according to most analysts. Amazon Web Services, the market leader in this field with ten times more capacity than the next four providers combined, estimates that a typical cloud customer can save up to 75% saving relative to legacy IT costs. In addition, consider that all data created and stored also needs to be secured. Cybercrime is estimated to cost the global economy as much as $575bn annually, with the number of annual cyber-attacks rising currently by over 50% (according to McAfee and Raytheon respectively).
The importance of artificial intelligence
The observation that “we are drowning in information, but starved for knowledge” was made by John Nasibitt in his 1982 work Megatrends. It is validity carries even more weight now than it did then. With the advent of usable machine-learning, the gap between data volume and knowledge is closing rapidly; or, as Sundar Pichai, Chief Executive of Google puts it, machine learning is “making us [our products] smarter and more useful every day.” The presence of powerful and low-cost processing chips, cheap storage capacity and the corresponding growth of massive databases of information have made AI both more potent and efficient. Simultaneously, the field of machine (or deep-) learning has expanded rapidly. Here, computer algorithms are able to recognise patterns in data and turn that data into knowledge. Such algorithms operate by building a model from example inputs in order to make data-driven predictions or decisions.
Many of us may already be familiar with Virtual Private Assistants such as Siri (Apple), Alexa (Amazon), Now (Google), M (Facebook) and Cortona/ Zo (Microsoft). These systems use AI and have become increasingly more intelligent, representing clear precursors to autonomous agents. Notably, Google, Microsoft and Facebook all announced during 2016 that they would open-source their machine-learning programming libraries (respectively named TensorFlow, the Distributed Machine Learning Toolkit and Big Sur), enabling third-party programmers to create AI applications and solutions using their code. The idea is to permit for the creation of a greater level of artificial intelligence at a faster pace.
Google, for example, says that over 50 of its products already use TensorFlow to harness deep-learning, while over 20 AI apps are available on Microsoft’s Azure cloud platform. Elsewhere, IBM has already licensed its AI solution (Watson) to a number of businesses and healthcare providers. IBM claims that Watson is capable of reading 800m pages of text a second, equivalent to ingesting 100 terabytes of data a day, and is able to suggest solutions based from an interpretation of this data. In a recent analysis of 1,000 patients with lung cancer, Watson was capable of achieving a far more accurate diagnosis rate relative to humans – 90% versus 50%. As the number of devices connected to the Internet grows, so should the market artificial intelligence. Chip manufacturer NXPI (currently being acquired by Qualcomm) estimates that by 2020, some 40bn devices annually will be shipped with intelligence.
The car of the future
Within the Internet of Things, arguably the most ‘thing’ will be the car, an effective super-computer on wheels. Similar to how the mobile phone, the PC and the Internet emerged as different products, their symbiosis complemented and accelerated each other’s adoption. Self-driving vehicles are capitalising on a convergence of multiple rapidly-advancing technologies including AI, sensors, graphics, processing, robotics, broadband wireless, advanced materials, 3D-visualisation and 3D-printing. The future car will also likely necessitate a comprehensive reassessment of global transportation and logistics networks.
The logic for the current business model of the car to evolve is a persuasive one. Car accidents are the eighth largest cause of deaths globally (ranking only slightly behind AIDS and lung cancer), according to the World Health Organisation. Moreover, consultants at Ernst & Young estimate that some 90% of vehicle-related fatalities – not to mention injuries – are the result of human error and driver distraction. Part of the reason perhaps why so many accidents occur is that our roads are congested. In the US, 42% of major urban highways are congested, based on recent figures released by the Texas Transportation Institute. The consequence of such congestion, states the report, is that American drivers spend nearly 5 billion cumulative annual hours stuck in traffic. Vehicles also guzzle gas, with various studies suggesting that automobiles globally may be responsible for as much as 20% of greenhouse gas emissions.
Cars are already changing, becoming both more efficient and more autonomous, regardless of who purchases them. In terms of efficiency, modern car manufacturers are progressively embracing lighter materials, better lighting and the adoption of telematics systems. Electric vehicles are roughly four times more energy efficient than combustion engine vehicles. For every 10% weight loss a car undergoes, there is a 5-7% gain in fuel savings. Meanwhile, LED lighting have a lifetime over 20 times longer than conventional halogen lighting, resulting in cost savings as well as additional safety benefits according to many manufacturers.
In the future, however, transport will offer a safer, more convenient and cheaper alternative to that with which we are familiar, a world where there is minimal waiting, an enjoyable travel experience and no subsequent hassle (such as parking or payment). Here, road transport becomes a utility, something that can be bought by volume, similar to gas, electricity and water. This evolution will necessarily result in a massive transfer of wealth to those who own the software (customer relationships) as well as the crucial infrastructure. We will be exploring this theme in more detail in forthcoming research.
The robots are still coming
Technology is about making our lives both easier and better. This is typically achieved through an interaction of software and hardware. The car represents one form this; the (industrial/service) robot another. Advances in robotics can help address at least three long-term challenges: sustainability (i.e. the more efficient use of scarce resources), productivity and mass customisation.
The substitution of labour for capital makes fundamental economic sense and the displacement of workers by robots is certain industries does not simply imply widespread unemployment, more a recalibration of certain roles. Worldwide, only around 10% of all manufacturing tasks are automated, with an average of just 66 robots per 10,000 employees. However, in the Japanese automotive industry, this ratio is around 1,500 (according to the International Federation of Robotics). Some 80% of the work required in manufacturing a car can already be done by a robot; future cars may not even require any human input.
Other examples abound too. One of the most astute investments made by Amazon was its 2012 purchase of Kiva Systems, a robotic supply-chain business. Its eighth-generation warehouses are fully-equipped with such robots (a seventh-generation warehouse we visited last year was also impressive). They can handle up to four times as many orders as a similar unautomated warehouse where users may spend as much as 70% of their time walking to retrieve goods. This matters, since the market for online retail is set to expand exponentially in coming years. Although over $1trillion was spent on e-commerce globally last year, this sum still represents less than 10% of all purchases made annually. The trends we described above (particularly the power of mobile broadband) should only serve to accelerate the online shift.
However, robotics and automation (as well as several other technologies) also have the potential to alter the conventional retail landscape. Last month Amazon – often the pioneer in terms of innovation (hence the quote from Jeff Bezos earlier) – launched Amazon Go. This is a brick-and-mortar retail store where it will be possible for customers to scan their phones as they walk into stores, grab what they need and walk out. While still in a trial phase, the potential is considerable.
Such a development also has clear implications for the future of cash. This is a theme we have written about with regularity in previous publications, but over time, we also envisage that cash as we conventionally conceive of it (whether physical or electronic) may end being superseded. Digital currencies may dispense with all this. Buyers and sellers would interact directly on a peer-to-peer basis in the digital world. In a fully digital world, not only are there no notes and coins, but also no banks. The system exists in the cloud and is maintained by a network of computers that anyone can join. Many barriers (regulatory, reputational, social) need to be overcome before the likes of Bitcoin can be considered mainstream, but it will be important to monitor developments here carefully.
Back to robotics and, elsewhere, robots are performing an increasingly important role in healthcare, not just in dispensing drugs but performing surgery. Intuitive Surgical, market leader in the field, reported that more than 750,000 procedures were performed by its robots during 2016. Overall industry assessments see the industrial automation market growing at least at 10% a year through to 2025 and being worth up $42bn in this timeframe (source: BCG).
The holy grail
Another 2025 prediction (this time courtesy of McKinsey) is that some 25% of US GDP will be spent on healthcare. However, it takes 12 years, on average, and $359m to take a new drug from lab to patient, with only 5 in 5,000 of these new drugs making it to human testing and only 1 of these 5 making it to human use. Thought of another way, of the $8trillion spent globally on healthcare, around 25% of this figure (or $2trillion) is currently wasted. The healthcare industry also produces a lot of data – 150 exabytes in the US alone (or 1x12 zero’s, according to IBM) – not all of which is likely used in an efficient manner.
Now, a convergence of exponential technologies is poised to revolutionise healthcare. Artificial intelligence, robotics, 3D-printing, big data, genomics and stem cells together make a potent combination. In one future vision of healthcare, AI-enabled autonomous health scans could provide best-in-class diagnostics to everyone; large-scale genomic sequencing and machine-learning may enable scientists to understand the root causes of diseases such as cancer and Alzheimer’s; robotic surgeons might carry out all operations at a low-cost and with perfect precision; and, labs could regrow critical organs with regularity. It is worth noting that the cost of sequencing the human genome has already fallen from $100m in 2001 to less than $1,000 at present. Against this background. 500m genomes may have been sequenced by 2025 (according to Illumina, a leading player in the field) relative to 600,000 in 2015.
In the near-term, the obesity epidemic may be the most pressing healthcare challenge facing the world. The number of overweight or obese people has tripled since 1980 with not a single developed world country having made progress in reducing its rates. Today, one-third of the world’s population (or 2.1bn) are now overweight including 671m who are obese (according to The Lancet). By 2030, this figure is expected to be 50% of the global population. Moreover, only around 55% of people with obesity have received a formal obesity diagnosis. In the US alone, nearly 79m people are currently living (or c25% of the population) are currently living with obesity, based on data collected by Novo Nordisk, Changing eating patterns therefore matters too.
Where to invest
Many of the trends described above naturally overlap and intersect, thereby magnifying their overall impact. Hence we believe that should investors seek to consider gaining exposure to them, then opting for a basket or range of businesses may be most appropriate strategy. What our preferred businesses share in common are five factors: clear and direct exposure to the theme(s) in question; leading market positions; above-average spend on research and development; strong financial track records; and high-quality management teams.
Investors should note that the below list is far from exclusive, but simply comprises a sample selection of what we believe to be ‘best ideas’ or well-exposed companies.2 Moreover, it should not be forgotten that given the nascent nature of many of these developments, several of the potentially most attractively-exposed businesses may still be privately owned rather than publicly listed. For more information on our investment process or our products, please do contact your representative at Heptagon Capital for more information.
The power of mobile broadband: AWS (Amazon), Azure (Microsoft), Equinix, TSMC
The importance of artificial intelligence: Google (Alphabet), NVIDIA
The car of the future: Tesla, TomTom, Valeo
The robots are still coming: Duerr, FANUC, Intuitive Surgical
The holy grail: Fresenius Medical Care, Illumina, Novo Nordisk
All of our previously published thematic research may be found on Heptagon Capital’s website. Over 2017, we will look
to publish further notes on selected new topics.
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