Beyond Bulls & Bears

Investing in Innovation

When you think about the rise of the technology sector, the “” boom of the 1990s—and its dramatic bust—probably comes to mind. Portfolio Manager Matthew Moberg sees investing in the technology sector as more than just jumping on today’s fad. He looks for innovative companies that have long-term potential for growth, even if they are not what spring to mind when thinking about technology. It’s a core part of a philosophy that was developed even before all the electronic gadgets we take for granted today even existed.
[php function=1]The companies Moberg targets certainly have included some typical tech names, but his investment universe goes beyond gadget-makers to include companies he and his team believe are leaders in innovation, are positioned to take advantage of new technologies, have superior management, and poised to benefit from new industry conditions.  Sound like qualitative crystal ball prognostication? To a degree, yes, but Moberg clearly knows what he’s looking for:

Matthew Moberg

“We are looking for new companies, new products, new technologies, new science and often new management. I think sometimes people associate the word ‘tech’ with electronics, but what we really think about is investing in new technologies and new innovation, and that can be found anywhere. That can be found in biotechnology; it can be found in agriculture manufacturing of new seeds, and it can also be found in retailing e-commerce.

We have noticed that the pace of new products is accelerating and data suggest when a new product is launched, if it’s successful, it has a faster global uptick than it ever has before. To us, that means the potential winners will be shown a little bit earlier and they may be greater winners, faster. That also means the converse is true on the loser side. It’s our job to find those companies that are crossing the chasm quickly and are finding new products, and as bottom-up investors, that’s where we think we can provide value.”

As anyone who read case studies in business school knows, fostering innovation so the result is a sustainable, profitable business can be part art and part science. So even if you think you’ve found an innovative company with a position or a product that’s conceivably got legs, how do you judge whether the management team has what it takes to avoid a spectacular, headline-making flameout? Meeting managers face to face helps. In Moberg’s words:

“It comes down to fundamental investing and really getting to know the management teams. Superior management is hard to define; sometimes you just know it when you see it. But we are looking for managers who can execute, who have great vision, who have high passion. It’s a bonus when they have a decent insider ownership, which is not uncommon in some of these new companies. Those are the types of metrics we use to evaluate management, but in my view, it’s mostly a qualitative assessment.”

Of course you probably don’t invest in companies like these unless you’ve got a growth motive, which, if you’re a long-term investor, generally means looking for sustainability. In the technology realm where a one-year product life can seem long-term, what do you look for? Seems about as clear as mud, but Moberg’s focus is quite crisp:

“We look at every company we invest in through the lens of growth, quality, valuation and sustainability. We are constantly looking for businesses that appear to have the longest runway for growth. And when thinking about valuation as a growth investor, often a lot of the value can be in the fifth-year and sometimes even in the 10th year, so that sustainability piece is extremely important. An example of a company we think has potential for sustainability is a provider of cloud-based business management software. As their clients succeed, it grows with them. So it’s not a sugar-high type sale where they sell a product once. It’s really a longer-term proposition. The lifetime value of a customer can be high.”

Investing for the long-term was a key part of Sir John Templeton’s philosophy, too, and he wasn’t one to follow fads. As he memorably said, “If a particular industry or security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.”

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What are the Risks?

All investments involve risks, including the possible loss of principal.  Investments in fast-growing industries, including the technology and telecommunications sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement. Small capitalization companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies.

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