This week’s FundCalibre interview is with Guinness Global Innovators co-manager Dr Ian Mortimer who starts with a critical definition of innovation as it applies to the fund’s holdings. He goes on to discuss companies within the fund’s nine core themes and outlines opportunities the managers have identified in various sectors.
Why you should listen to the interview
This fund will be of particular interest to investors who like to be at the forefront of innovation. The two managers are highly experienced and have developed a clear and consistent process which has proven to be successful with excellent long term performance.
This interview was recorded on 7 June 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
What does innovation mean for you?
“What innovation means to people today might be somewhat different to how we considered it two decades ago when we started running this strategy. Today it’s often associated with early stage or disruptive businesses. However, what we are really looking for is essentially quality growth companies and the way we’re thinking about innovation is really the starting point for where we’re beginning our process, which is looking for companies exposed to long-term secular growth themes. It is quite difficult to find those companies that are likely to be the big winners and we’re all about trying to increase the probability of good returns and finding those quality compounder-type stocks.”
The decade of the semiconductor
“It’s very interesting how the market perception of the semiconductor industry has evolved. Previously it was a very cyclical industry previously because it was basically all about PC sales: how many computers are businesses and individuals buying? How many chips do they need therefore to supply that? In a positive economic environment, businesses buy lots of hardware. Then there’s a recession and people don’t buy very much at all so you get these bigger overhangs and this steep cyclicality.
“However, these days, if you think about just day-to-day life, we’re finding there’s demand for semiconductors across many different areas, whether it’s electric vehicles; your mobile phone and iPad; all the way through to industrial processes, robotics and logistics for example.
“If we look across all of our different themes, what we’re seeing now is quite strong demand for semiconductors in each of them. We have had quite a big overweight to the semiconductor industry for a number of years and it’s been incredibly interesting to watch how that sector has evolved. Our view on that was we felt the demand side was very positive so we felt that the revenues of these companies could grow.
“The more interesting part was that we felt the industry was potentially moving into a period of change where it was becoming less cyclical. It’s now much less cyclical than it was because the demand picture is so much stronger and it was also interesting to see the potential for quite a big uplift in terms of the valuation that market participants might place on them. And that’s something we’ve definitely seen in particular over the last 18-24 months where that particular space has really outperformed quite significantly.”
AI is not the only reason to buy in
“Looking at AI in healthcare, one fairly recent addition to our portfolio is Siemens Healthineers. A large part of its business is scans and diagnostics for example and they are integrating AI within that process to help them improve patient outcomes and improve efficiency of reviewing those scans and so forth. But that is not the only part of their business. We think that it’s quite a strong business overall which is reasonably good value because it’s been a bit oversold for things like its potential exposure to China. Plus, their diagnostics business has actually been underperforming but we think that’s slowly turning around.
“This is a very strong business which has been somewhat overlooked by the market. We think they can actually improve parts of their business that have been underperforming and we can see a good pathway for them to do that. That should therefore lead to a potential re-rating of that stock over time whilst we’re also receiving that growing earnings, which is ideally what we’re looking for.
“Part of the interesting things that these types of companies do is they have quite a big R&D spend, they are technologically advanced businesses which are constantly reassessing and reinvesting back into their business to keep improving and provide better outcomes for their clients. And as part of that, they’ll clearly be looking at things like AI and technology and software improvements to continue that. These are the types of companies we think are quite well placed to take advantage of AI because using new technology to improve is already in their DNA. We think we’re going to see more and more of these types of companies that can successfully implement these new technologies to take an advantage relative to their competitors.”
Trimming our Nvidia position
“Nvidia is a company we’ve owned in the Guinness Global Innovators fund for more than 15 years, so it’s been a very, very long term holding for us. And we’ve seen that performance really come through. It’s been a big part of our performance track record, but one must remember not to get too carried away.
“We always think about stock specific risk so we are always trying to think about the balance between letting your winners run and wanting to try and capture as much of that strong performance as you can. The risk though is that if a company is doing that, it becomes a bigger and bigger part of your portfolio. These things don’t necessarily last forever and if you end up on the wrong side of it, you’ve then got a very big weight in your portfolio. If that then turns, you can then suffer quite big drawdowns and maybe you give up quite a lot of that strong performance that you previously had.
“What we do in our fund is we actually run a 30 stock equally weighted portfolio. We’re happy to let stocks run but if they’re starting to get above the 4.5% – 5.5% level in our portfolio, we tend to step in and reduce that back down, taking some profits along the way. And that’s something we’ve done with Nvidia over the last 18 months. We’re not trimming it constantly because we want to get that benefit of these strong share price rallies, but we are conscious that narratives can change in markets and therefore we manage that risk through the systematic application of our investment process.”
Conclusion
This fund’s core ethos of innovation makes it an exciting and dynamic addition to investor portfolios. The managers have a decade of experience in this arena and investors may certainly benefit, as is evidenced by the strong long-term performance of this fund.
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