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: Innovation is thriving in the US. This was our key takeaway from four days of company visits across the New York and Boston areas. Nearly every business we met highlighted how it is currently growing its research and development spend and using innovation as a form of differentiation. We remain of the view that businesses that are investing intelligently now , should be best-placed to benefit over the long-term. Correspondingly, the conviction we have in our Future Trends investment process only grows.
Four days on the US East Coast saw your Fund Manager visit a plethora of businesses in areas as diverse as food innovation, payment solutions, blockchain, robotics, cybersecurity, artificial intelligence, gene editing and the microbiome. In addition, we attended #TechDay in New York, America’s largest event for start-ups. As we stress regularly, our approach is pan-thematic, seeking to invest only in the businesses we see best-placed to benefit from the future.
There is indeed a lot happening on the East Coast. Two of the Fund’s top-ten holdings (MasterCard and IBM) have their corporate headquarters located in the New York vicinity, while another (ASML) has its US headquarters in Connecticut. We visited all three and toured the ‘clean room’ of ASML, where its advanced lithography machines for producing semiconductors are partially manufactured. Boston is booming. The city’s top-100 digital companies employ over 37,000 people and we visited three of the top-ten ranked companies in the field: Akamai, athenahealth and iRobot (data and rankings per ‘Built in Boston’, a local start-up community website). The proximity of MIT and Harvard are an inevitable draw for many businesses. Notably, Amazon has recently announced plans to hire an additional 2,000 people in Boston. Meanwhile, #TechDay is now in its seventh year, attracting over 20,000 attendees and more than 500 start-ups.
Below follows a summary of our seven key, high-level insights:
• Innovation is core: Almost every business we met stressed to us the importance of innovation. This is most tangibly evidenced via the growth in research and development spend (expressed in absolute Dollar terms and/or as a percentage of revenues). Specifically, MasterCard highlighted how money is “never denied” for projects that make its ecosystem better. Meanwhile, ASML stressed that its market leadership stemmed from “out-innovating” its peers. IBM emphasised that “doing innovation for innovation’s sake” was core to its business and has been since its inception. Common across our investments in the Future Trends Fund is an above-average spend on research and development.
• The race is on for talent: notwithstanding the proximity of many of America’s top universities to New York and Boston, another consistent message from our visits was one of shortage of talented personnel, particularly data scientists (with specific expertise in machine-learning). Events like #TechDay are valuable forums for large companies to pitch their businesses and attract new talent. In general terms, however, competition for the best employees (and related remuneration) remains less intense in the US North East than over in Silicon Valley.
• Where is all the money being spent? Beyond company-specific R&D projects and the related hiring of the right talent, we detected two consistent messages: spending is increasing on better security solutions and on leveraging artificial intelligence (AI) capabilities. With regard to the former, there is an acute awareness of potential damage to business credibility from compromises to cybersecurity, and hence investment in this area has become a top priority for every company we met. Indeed, cybersecurity is moving from being an IT-specific issue to a Board-level matter of importance. Additionally, most businesses were aware of the large datasets of proprietary information they owned and are now thinking more about how best to leverage them. Investing in maths-based AI represents one solution.
• What comes after cybersecurity and AI? While there is undoubtedly huge future potential in both these fields, the other message we heard consistently was one stressing the importance of blockchain. Businesses are beginning to understand that blockchain can offer a secure ‘source of truth’ that is unavailable elsewhere and are working out how best to integrate this. Some larger businesses whom me met (such as MasterCard) have built their own proprietary blockchain networks, while others are trialling applications available from market leaders such as IBM. It became clear from our IBM meeting that the business has a clear first-mover advantage in the field (many of the mega-cap tech businesses have prioritised cloud and AI investment over blockchain), which it intends to continue to press.
• Exciting developments afoot in life sciences: Cambridge, Massachusetts contains multiple emerging biotech start-ups. We met several, focusing in particular on the still-nascent fields of synthetic biology (the creation of new biological entities), CRISPR (gene-editing) and the microbiome (leveraging the bacteria in the human body). While much of the science is at a pre-clinical stage, what underpins developments in all the above areas is the primacy of molecular diagnostics – in other words, being able to efficiently sequence and analyse genetic data. We have been investors in Illumina, the leading provider of such diagnostics tools since the inception of the Fund.
• Expect more M&A: 2018 to-date has been a record year for deals. More seem likely. Two areas stood out for us as being particularly interesting based on our meetings: food innovation and cybersecurity. In terms of the former, IFF (whom we met) has announced plans to buy Frutarom, while its peer Givaudan is acquiring Naturex. As eating habits shift increasingly to ‘natural’ and ‘clean label,’ so corporates are responding. Given the growing importance of cybersecurity referenced earlier, the businesses we met in this space similarly emphasised the logic for deal-making particularly given the fragmented nature of the sector and the multi-faceted nature of the cybersecurity challenge.
• What wasn’t discussed: Regulation was a subject rarely traversed in our meetings. Some of this may be a function of not being in Silicon Valley, but the management teams whom we mostly met either saw themselves as being emerging disruptors (and so not subject to adverse scrutiny) or were of the view that other matters (such as economic nationalism and creating ‘strong’ global businesses out of the US) were of greater near-term importance.
The future remains highly exciting, a view only reinforced as we learn more about it!
Alexander Gunz, Fund Manager, Heptagon Capital
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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. Executive Summary: Thematic investing is a core part of our investment process at Heptagon. Since 2011, we have published 50 dedicated pieces of thematic […]
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