How to Profit from Innovation

Innovation investing is not just about technology companies. Guinness fund manager Ian Mortimer finds innovation through industrials and consumer stocks

Emma Wall 4 May, 2018 | 8:07AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Ian Mortimer, Manager of the Guinness Global Innovators Fund.


Ian Mortimer: Hi.

Wall: So, what does innovators mean, because I imagine it's one of those titles that's rather open to interpretation for the fund manager?

Mortimer: Yeah. I think it means different things to different people. I think what often people think is when you think of innovation they think of small-cap very disruptive technology companies, which is obviously true. We take a much broader view of what we mean by innovation.

And really what we are attempting to is find companies doing something different or better and more innovative than their peers who would then have a better growth path going forward. And we don't think it's just technology companies. We think we can find innovation throughout industrials, consumer discretionary and a wide range of different sectors.

Wall: How much does this play into the whole theme of disruption, because it's quite a fashionable at the moment with investment picking those companies that are not just going to shake things up but be the leaders within certain sectors going forward?

Mortimer: Yeah. So, the way we approach it is, we come up with about 10 to 15 themes and they can stretch today from sort of artificial intelligence to driverless cars, and we then try and find companies that have exposure to those themes from an economic perspective.

The second stage there we do is we say just because the company is innovative doesn't necessarily make it a good investment and I think that's the difference. So, we then screen that down a bit further, look at things like good return on capital or good balance sheet. And then ultimately, we are doing sort of bottom-up stock selection to say how are these companies growing. And we might think of it sort of – we sort of do it in three ways.

One is to kind of inventing. So, you create a brand-new product. The second is more to your point, kind of, disruptive. You can move in and take market share. And the third element is sort of those leaders. So, these are slightly larger companies that are more reinvesting sort of in their R&D or intellectual property to maintain their competitive edge versus their peers.

Wall: And what's the turnover like on the fund, because one imagines people who are innovators today probably weren't 10 years ago?

Mortimer: Yeah. So, actually, we try and maintain a low turnover. So, typically, it's somewhere between 20% and 30% of the names. And we run a pretty concentrated portfolio. So, maybe 30 stocks on an equally-weighted basis. So, it's quite different. Some of our holdings we've held for more than a decade and others we've held for shorter periods.

But we believe we are not trying to find sort of very early-stage venture capital type companies. We want companies with good cash flows, good balance sheets and ultimately, earnings that we can understand.

Wall: And what about valuations, because tech – I know you are not purely tech – but tech stocks in particular are famously highly valued and it's all about kind of is this multiple really reflecting the kind of growth one can expect as a shareholder going forward?

Mortimer: Absolutely. And the history of the strategy has been we've been doing this since 2003 and technology or the IT sector has been a good proportion of our fund. So, on average, maybe it's 40% to 50%. The way we kind of think about valuations is absolutely the same as you just described.

It's balancing the valuation versus the potential growth prospects. And we would always say we sort approach growth with a valuation discipline. So, when we are buying a company, we always want to see some prospect for a multiple expansion for that business.

So, we are not purely just investing in growth for growth sake, fingers crossed it comes through. We'd like to give ourselves some element of sort of that margin of safety idea. And when you look at the valuation of the portfolio as a whole – for example, today, it's only trailing at, let's say, 6% premium to MSCI World despite having a 25% higher earnings growth expected.

Wall: And what the pitfalls though? Because you don't have a crystal ball into the future. You can make informed guesses. There must be some innovators along the way that prove not to be.

Mortimer: Absolutely. We can't get it right all of the time. But I think one of the things we're trying to avoid is, by having that sort of element of trying to see the quality of the business. So, we've got companies with high returns on capital. We focus quite closely on the balance sheet strength, for example.

So, we tend to find the sort of mistakes, if you like, we're making is companies don't grow quite as fast as we'd like, maybe they slightly disappoint the market and therefore, that's reflected in the share price. What we don't tend to invest in is those sort of binary type companies. So, yes, its products work amazing, or no, its product didn't work and now it's actually sort of worth nothing. So, we are trying to avoid those, sort of, those binary type bets.

Wall: Ian, thank you very much.

Mortimer: Pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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