The Science and Tech (London Capital) portfolio strategy gives investors access to the growth potential of forward-thinking, innovative science and technology companies in sectors such as health and life sciences; bio technology; telecommunications; computer and e-commerce.
Watch GLC’s Amin Barakat, VP and portfolio manager Martin Rose, VP Equities speak about how Martin and his team manages the Science and Tech fund which has delivered strong performance for the long-term, and during COVID-19 market volatility.
Highlights from the video include:
- Lead portfolio manager Martin Rose explains his investment process that led to a portfolio of companies that have changed the world, and companies that are about to change the world, and he outlines the company characteristics he likes to see before he buys.
- Despite being a sector focused fund, the portfolio is designed to balance stability and growth opportunities through a mix of larger mature companies with strong strategic positions in established industries and smaller companies that have developed a new or disruptive product or service that can unseat the current market leaders or perhaps start a whole new market.
- Why today’s challenging market environment isn’t dampening the portfolio management team’s enthusiasm for the long-term potential of the companies held in the fund.
Video description: Opening slide, dated April 22, 2020. Science and Technology Equity (London Captial), slide fades into Amin Barakat and Martin Rose speaking with each other.
Amin: Hello and thanks for joining us, I’m Amin Barakat, Vice-President at GLC and I’m joined by Martin Rose, Vice President and Portfolio Manager of the Science and Technology fund with our London Capital team. Thanks for being here Martin.
Martin: It’s good to be here Amin.
Amin: When compared to the overall performance of the market, your fund has an attractive track record of performance, including during periods of volatility, like the first three months of 2020. Can you tell us a little bit more what’s been behind that?
Martin: This strategy is actually a lot more focused than the overall market. We’re focused on technology companies that have built or are building and solidifying leading positions in their respective industries. These types of companies have done quite well over time relative to the market.
Amin: Right, and historical there’s often a lot of enthusiasm behind tech stocks. Could you tell us a little bit more on why that’s the case?
Martin: When looking at technology stocks you will find a lot more secular growth opportunities than in other sectors of the market, meaning they’re less reliant on overall economic growth than your average company. In the low growth environment we’ve seen the past few years, investors are willing to pay more for these secular growers. This has been driven by some rapid advancements in technology over the past 10 years and many companies were founded or are Opening adapting in order to take advantage of this. These new advancements have changed the way we live, work and engage in the world around us. Just think about Apple’s iPhone, Google Search, Facebook, and Twitter. These have become ubiquitous in our daily life but have transformed how we communicate, access information, and do business. And keep in mind behind each of these companies that the end consumer sees, there are hundreds of semiconductor, networking equipment and software companies that make it all work. To be clear, it isn’t just promise that these companies are trading on – many of them are highly profitable and continue to have good growth rates into the future.
Amin: When you take us through some of those stories and major developments that have happened it really does put things into perspective in terms of justifying some of that enthusiasm and excitement. Alright so, how would this view apply to your thinking about the industries you look at within the Science & Technology fund?
Martin: The companies we identify and invest in tend to fall into two categories, designed to balance stability and growth opportunities. The first category consists of larger mature companies with strong strategic positions in established industries. They tend to have lower valuations and lower overall business risk. We would hold fewer of these companies but with a larger weight. The second category consists of smaller companies that have developed a new or disruptive product or service that can unseat the current market leaders or perhaps starting a whole new market. These companies have higher valuations, growth rates and overall risk. We hold a higher number of these companies in smaller weights in order to lower the overall risk exposure of the fund while maintaining the growth optionality. Now to answer your question in the second half of this year we did reduce the fund’s exposure to the second category, moving some assets into larger cap, lower risk companies as we wee getting less and less comfortable with the valuations that we saw in the market. And that move proved timely as the market did see some significant weakness in the first quarter, but we’ve since been moving some assets back into those smaller names that have sold off to more attractive valuations during the pandemic while still remaining in their strong competitive positions.
Amin: You paint a pretty solid picture of a portfolio that’s purpose build by design in terms of its construction and clearly a methodical approach to investment strategy, that’s pretty interesting stuff. I’m wondering overall, these companies seem to be given premium valuations relative to the market given their growth potential. Are you still as confident about the ability of these companies to achieve investor expectations as you look forward?
Martin: Yeah, I am. Some of theses estimates are going to be pushed out by 2 or 3 quarters as we are seeing fewer deals get done in this environment but we certainly believe the long-term outlook remains attractive for such companies. As you said, many have elevated valuations, so we wouldn’t be surprised to see higher volatility over the near term. Especially when we have less visibility, such as in current conditions where companies are taking a cautious approach to giving financial guidance. The bottom line is that we seek out companies whose fundamentals will be stronger on a relative basis over time. Challenging market environments actually serve to underscore our preference to pay a reasonable premium to own higher quality names. Our experience and results have supported taking a disciplined approach.
Amin: Those are pretty solid insights and it’s good to know you feel that long-term growth opportunities continue to surface, provided you have the patience and temperament to hold through periods of volatility and uncertainty.
Martin: Absolutely, we think times of market uncertainty is where professional investment management helps to differentiate market leaders. As active managers we are constantly reviewing our investment decisions and revisiting our assessment of each holding we spend a lot of time of the broader investment landscape to determine the implications going forward that we own or might own in the future. It’s an intensive process but the long term results justify it.
Amin: Thanks Martin, I appreciate you taking the time, and sharing some insight into the opportunities for investors in the science and tech fund in general.
Martin: My pleasure, Amin.
Video Description: Slide showing a picture of the GLC website.
Amin: If you’re interested in general to learn more about this mandate or other mandates please visit the GLC Asset Management Group website: www.glc-amgroup.com Thanks very much for joining us and look forward to seeing you next time.
Video Description: Slide showing the disclaimer text below
Disclaimer: Copyright GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC). This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor. Past performance is no guarantee of future results. There is no guarantee that investment objectives, or risk or return targets discussed in this material will be achieved. No part of this material may be reproduced or redistributed in any form without express written permission of GLC Asset Management Group Ltd. The data provided is for information purposes only. This material is not intended to be read in isolation and may not provide a full explanation of all the topics that are presented and discussed. Information contained in this material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This material should not be considered a recommendation or offer to purchase or sell any particular investment.
Want more? There's a podcast too.
This portfolio invests primarily in U.S. and Canadian companies with strong growth prospects in science and technology related sectors. These growth companies rapidly evolve in today’s marketplace. In short, they are “companies that have changed the world, and companies that are about to change the world!”
Amin and Martin add more detail to the types of holdings held within the portfolio today in GLC’s podcast: GLC’s Science and Tech portfolio – finding growth opportunities through innovation.
Amin: Thanks for listening into our call, which is being recorded on Wednesday, April 22nd, 2020. I'm Amin Barakat, vice president of GLC and I'm joined by Martin Rose, vice president and portfolio manager of the science and technology fund with our Lennon capital team. It's probably as good a time as ever to get a better understanding of this fund having delivered some pretty solid performance over the past several years while also generating more interest among advisors. Over the next 10 minutes or so, we're going to get some great insights into the investment process. Martin and his team take the outlook for stocks and the industries they invest in and spotlight a few stocks they currently own. Thanks for being here, Martin.
Martin: Thanks. Amin it's good to be here.
Amin: Martin, when compared to the performance of the overall market, whether we're looking at the S and P 500 in the U S or the S and P TSX composite index in Canada, your fund has done quite well over the past five years and especially over the volatile first quarter of 2020. Can you tell us a little bit more about what's behind that?
Martin: Sure. This strategy is actually a lot more focused than the overall market. We're focusing on technology companies that have built or are building and solidifying leading positions in their respective industries. And these types of companies have done quite well over time relative to the market.
Amin: There's historically been a lot of enthusiasm behind technology stocks. Can you elaborate a little bit more on, on why that is?
Martin: Well, when looking at technology stocks, you will find a lot more secular growth opportunities than in the other sectors of the market. Meaning they're, they're less reliant on overall economic growth than your average company. And in a low growth environment that we've seen over the past few years, investors have been willing to pay more for these secular growers. And this has really been driven by some rapid advancements in technology over the past 10 years and many of these companies were founded or are adapting in order to take advantage of this. These new advanced advancements have really changed the way we live, the way we work and engage in the world. Just think about Apple's iPhone, Google search, Facebook and Twitter. These are become ubiquitous in our daily life, but have transformed how we communicate, access information and do business and keep in mind behind each of these companies that the end consumer sees. There are hundreds of semiconductor and networking equipment and software companies that make it all work. And to be clear, it's not just promise that these companies are trading on, most of them are highly profitable and continue to have good growth rates.
Amin: So how do you apply this at the sector level within the fund?
Martin: Well, the companies we identify and invest in tend to fall into two categories designed to balance both stability and growth opportunities. The first category consists of larger mature companies with strong strategic positions. In established industries. They tend to have lower valuations and lower overall business risk. We would hold typically fewer of these companies, but with a larger weight in each one. Uh, the second category would consist of smaller companies that have developed a new or disruptive product or service that can unseat the current market leaders or perhaps start a whole new market. Um, these companies tend to have higher valuations, higher growth rates, and higher overall risk. Uh, we do hold a higher number of these companies, but in smaller ways in order to lower the overall risk exposure of the fund while for T, uh, maintain the growth optionality. Now to answer your question in the, in the second half of last year, we did reduce the fund's exposure to the second category, moving assets into the larger cap, lower risk companies as we were getting less and less comfortable with some of the valuations we were seeing in the market. Um, and those moves proved timely as the market saw significant weakness in the first quarter of 2020. Um, we have since been moving some of these assets back into the smaller names, uh, that have sold off to more attract evaluations during the pandemic while still remain, uh, remaining in their strong competitive positions.
Amin: It sounds like it's a pretty methodical approach and a very purpose built design, uh, when you, when you construct the fund that way, uh, now tell me a lot of these companies, they tend to have been given a lot of premium valuation relative to the market, given their growth potential. Are you still as confident about the ability of these companies to achieve investors expectations?
Martin: Yeah, although some of these estimates are going to be pushed out by two or three quarters, as you know, fewer deals are being closed in this environment that we're in now. But, uh, we still believe that the long term outlook remains attractive for these companies. And as you said, many have elevated valuations. So we wouldn't be surprised to see higher volatility over the near term. Um, especially when we have less visibility as we do now. But the bottom line is we look for companies whose fundamentals will be stronger on a relative basis over the long term and, and challenging market environments such as now reinforce our preference to pay a reasonable premium to own these higher quality names.
Amin: Makes a lot of sense. Can you tell us a little bit about whether or not you've got specific criteria that businesses should possess for you to consider investing in them?
Martin: Every company will have unique considerations to take into account. Uh, you know, no two businesses are identical and as I mentioned, we do tend to group our investments at the two categories, uh, mature, lower risk and high growth, high valuation. Um, some characteristics we look for across all the companies is uh, a good management team, a strong balance sheets and strong end markets with secular growth opportunities for the large company basket. The most important characteristics we look for are strong competitive moats that would lead to high switching costs for the customers. Uh, we also look for strong return on capital and cash flows. Um, their products and services are seen as more of a necessity or supportive of mission critical activities for their customers. These types of businesses are not going to be as sensitive to the shorter term developments such as, you know, changes in interest rates, trade dispute, so like election outcomes and things like that. Now, for the smaller high growth basket, um, the most important thing we look for is a path to profitability. Uh, that's very important and you aren't going to get that without a high growth, uh, potential for the company. Um, the majority of these types of companies have developed innovative or disruptive technologies. That's, that's better than what is currently available on the market and are fighting to unseat the incumbent technologies. And you can currently find a lot of these opportunities in both software and hardware.
Amin: Okay. You can have as a pretty extensive look at your process and philosophy. Uh, I'm wondering if you can give us a couple of examples of businesses that exhibit some of these characteristics we've talked about.
Martin: Sure. Well, one of the companies that we really like is visa. Um, you know, everybody's familiar with it. Uh, they've got a very strong global network. It makes them, uh, makes it extremely challenging for a new competitor to come in at a similar scale. Now visa does, they, they basically take a cut of every transaction that occurs over their vast network and they don't carry the credit risk that's, that's held by the company issuing the particular visa card.
Amin: That sounds like a great example of a business that's got a higher reward, lower risk value proposition.
Martin: Yeah. Over time. We certainly think so. And, and while they do have to contend with economic cycles such as this year when consumer spending maybe down, uh, with the followed from the COBIT 19 pandemic, the secular trends remain in place, you know, Visa's dominant market position, um, gives it a strong advantage, uh, as the environment improves and economies start to recover and consumption comes back. Uh, it's also a major beneficiary of the secular trend of digitization of transactions. You know, away from physical cash, particularly in developing countries. And another, um, driver for their profitability, uh, comes from the exchange rates that are incurred from cross border shopping transactions as this is a really high bar, high margin business for the company. Many of us have had that sinking feeling when we see how much our out of country purchases cost this and exchange fees. Yeah, definitely. And it's a feelings of profitable one for visa, you know, they're benefiting also benefiting from the rise of the gig economy as the, as the company is now facilitating near instant cash transfers from person to person.
Amin: These are great global examples. Can you talk to us about a Canadian company you'd hold in the fund?
Martin: Sure. I'd highlight Shopify is one of the best Canadian stories out there, you know, as a software company that facilitates entrepreneurship in a digital online age that we're in a, they have great potential for solid long term growth and with the shutdowns and social distancing measures taking place in response to the virus, the online marketplace is really allow consumer spending to continue with relative normalcy given the closures of physical brick and mortar locations. And I think it will really result in people getting more and more comfortable buying goods online. Right. I mean a lot of traditional retailers have actually pointed to the surge in their online sales while we stay at home. I think it would be within this space. Amazon has actually gone on a hiring spree to keep up with our customer demand. Yeah, absolutely. And we hold Amazon in the fund as well.
Amin: Oh, no kidding.
Martin: So going back to shock Shopify, their compelling value proposition really lies in their ecosystem. Their, their platform offers everything from website hosting and management to facilitating secure online transactions and now even inventory management and shipping services. So, you know, the company really benefits from strong network effects is more companies use their platform, they can adapt and scale their services, making them more responsive to the data that's being generated by the businesses and their customers. And it really allows them to continually improve that eCommerce experience.
Amin: So hang on a sec. Martin, it sounds similar to Amazon. Would that make them a direct competitor? In some ways?
Martin: Yeah, in some ways. But there are some differences. One of them being that Shopify really allows businesses to retain more control over their data and their costs and Shopify is able to offer their services in a cost effective manner, making it possible for startups to reach markets that would otherwise not be feasible through traditional marketing and sales platforms and they're not just geared to startups, but any business looking to manage costs while delivering a solid e-commerce experience can benefit from using Shopify and we're seeing this as more large brands have started using Shopify to enable a direct to consumer option for their products.
Amin: Martin, from this conversation, it's reassuring to know that you feel that there's longterm growth opportunities that continue to surface. It's just a matter of having the patience and temperament to hold through periods of volatility and uncertainty.
Martin: Yeah, absolutely. We think times like this are where professional investment management really helps to differentiate market leaders and has active managers. We're constantly reviewing our investment decisions and revisiting our assessment of each holding. We spend a lot of time on the broader investment landscape to determine the implications going forward. For the companies we own are the ones that we might own in the future and it's a really intensive process, but there is the longterm results justified.
Amin: Thanks Martin. I appreciate you taking the time, sharing your outlook and some of these investment ideas.
Martin: You're welcome to me. My pleasure.
Amin: We've been speaking to Martin Rose, vice president, portfolio manager of the science and technology fund with our London Capital team. If you want to find out more information about this or any of our other mandates, please visit the GLC asset management group website. Thanks very much for joining us and see you next time.
Disclaimer: The views expressed in this commentary are those of GLC asset management group limited as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances.
Copyright 2020 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).
This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.