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James Henderson, Co-Fund Manager of Lowland Investment Company (LON:LWI), challenges the consensus that the UK is destined to lag behind the US, owing to the absence of large-cap tech companies.
The main US index, the S&P 500, has a 22% weighting in tech companies, while the UK FTSE All Share, by contrast, has only 1%. The companies driving change and expanding quickly in recent years have been the tech 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 fuelled a belief among some that the UK will be a continual underperformer.
The strange thing is, the UK has generated many of the great tech advances , 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 tech can be a factor. Many UK equity investors have wanted to see cash generation and resulting dividends from the companies they invest in, but tech companies in the early days absorb cash and often need to return to investors for further capital injections. 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 is a lack of models to copy in the UK, of tech entrepreneurs that have taken companies all the way and some, such as Dyson, have done it away from the gaze of the stock market.
Off the beaten track
UK investors should not despair at the minimal tech weighting in the index – there is plenty of cutting-edge technology in the UK that will create real value in the future. However, these companies do not reside in the tech sector. Take Rolls-Royce (LON:RR.) (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 using this great technology for years to come. The technology in British Aerospace is world leading in their area. AstraZeneca (LON:AZN), 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 recognised by the market. For instance, one of the most instructive company visits I have made was to chemicals company, Croda (LON:CRDA) in the early 1990s. The company had 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 4,800p at the time of writing.
Companies are successful because they have an excellent product − and the successful application of technology is 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
Service is also 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 (LON:HSX), the insurance company, which has been in the Lowland portfolio for nearly two decades. Its application of technology to the underwriting process, combined with a service culture has led to very strong growth and the company has created a large retail-insurance business in the US. As a result, the share price has gone from 140p to 1,600p over the last 20 years, 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 technology 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 using a technology they really understand, to create an excellent, competitive company. The UK, fortunately, has another generation of these companies coming through. It is finding these companies and building a portfolio around them that will future-proof your investments.
Dividend: A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits.
The past performance of an investment is not a reliable guide to its future performance. For UK investors only. For promotional purposes. The value of investments, and the income from them, can go down as well as up, and you may not get back the amount you invested. Nothing in this communication is intended to be or should be construed as advice. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Before investing in any investment referred to in this communication, you should satisfy yourself as to its suitability and the risks involved. Nothing in this communication is a recommendation or solicitation to buy, hold or sell any investment. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Issued in the UK by Janus Henderson Investors.