James Henderson, Co-Fund Manager of Lowland Investment Company, challenges the consensus that the UK is destined to lag the US, owing to the absence of large-cap tech companies.
The main US index, the S&P 500, has a 22% weighting in technology companies, while the UK FTSE All Share by contrast has only 1%. The companies driving change and expanding fast in recent years have been the technology giants, such as Apple, Google and Amazon. These companies, among others, have been central to the outperformance of US equities over UK stocks in the past five years-plus, which has fueled a belief among some that the UK will be a continual underperformer.
The strange thing is, the UK has been the home of many of the great technology advances over many years, yet they have rarely been commercialised into successful tech companies. The reasons are much debated and there are many contributing factors. The lack of an investor audience with suitably deep pockets and the patience for the long term investment in technology can be a factor. Many UK equity investors have wanted to see cash generation and resulting dividends from the companies they invest in, but technology companies in the early days absorb cash and often need to return to investors for further capital injections; and when these injections are not forthcoming the business may be sold to an overseas company that then takes the technology forward.
The management team has often been an issue with start-ups. A very good inventor bursting with ideas may not have the management qualities needed to grow a business beyond the early stages. There are a lack of models to copy in the UK of technology entrepreneurs that have taken companies all the way and some, such as Dyson, which has done it away from the gaze of the stock market.
Off the beaten track
UK investors should not despair at the minimal technology weighting in the index – there is plenty of cutting edge technology in the UK that will create real value in the future, but these companies do not reside in the tech sector. Take Rolls Royce (a holding in the Lowland Investment Company portfolio); the development of the Trent engine took many years of innovative design and testing. Boeing and Airbus will be utilising this great technology for years to come. The technology in British Aerospace is world leading in their area. Astra Zeneca, another Lowland holding, is a world leader in oncology and respiratory research. This list goes on.
A good investment strategy is to find a company with an excellent product that has not been recognized by the market. For instance, one of the most instructive company visits I have made was to Croda in the early 1990’s. The company had more experience and understood the importance and qualities of Lanolin. This know-how led them to develop the ingredients behind many personal care products. The share price at the time of the visit was 180p, it was around 4800p at the time of writing.
Technology innovation in its broadest sense is what good companies do. Companies are successful because they have an excellent product. Technology and its successful application are often the vital ingredient. UK investors need to find companies with robust products that are globally competitive, and that is exactly what we try to do for the Lowland Investment Company portfolio.
Technology and service
Technology will be a vital component, but it will not be the only part because service is important. A company that applies technology and service to a very high level will have a winning formula. An example of this in the UK is Hiscox, the insurance company, which has been in the Lowland portfolio for nearly two decades. Their application of technology to the underwriting process combined with a real service culture has led to very strong growth and they have created a large retail insurance business in the US. The share price as a result over the last twenty years has gone from 140p to 1600p with very good dividend payments along the way.
Investing in early stage technology is very difficult. Good ideas alone will not make for a good company as there are many other ingredients required, including luck. So few succeed because the pure tech space is very competitive, while the life cycle of a successful technology may be short because there is always something new coming along. The winner in new technology often takes all and the rewards for the winners are massive. However, there is another way of investing and that is to look for companies that are utilising a technology they really understand to make themselves an excellent, competitive company. The UK, fortunately, has another generation of these companies that are coming through. It is finding these companies and building a portfolio around them that will future proof your investments.