Why You Should Invest in Dynamic Companies

Being dynamic has never been as important as it is now, when only those companies able to adapt can survive the Covid-19 crisis

Annalisa Esposito 8 December, 2020 | 9:48AM
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In such a challenging environment as 2020, only businesses that can adapt quickly will manage to survive, and only the best of those will thrive. Paul Jourdan, manager of Amati UK Smaller Companies, says it has never been more important for companies to be dynamic. He is looking for firms with the ability to innovate relentlessly, evolve continuously, to maximise opportunities and create value, growing into and dominating spaces at the expense of those businesses that were champions of the past.

It is the UK's smaller companies that are best placed to achieve this, he argues. It is a view share by Roland Arnold, manager of the Silver-Rated BlackRock Smaller Companies Investment Trust (BRSC); he believes small-caps are more agile and better able to adapt to changing market dynamics, while many larger companies simply lack the flexibility to respond to changes in the markets in which they operate.

Structural Trends

We've written before about how Covid-19 has accelerated many structural trends that have been emerging in various industries: digital transformation, for example, is one area that has hit fast-forward since the pandemic as businesses invest in their digital capabilities in order to drive demand and adapt to changes in consumer behaviour.

In particular, Arnold is looking to companies exposed to or driving this digital shift in areas such as digital marketing and data analytics, cloud-enabled video and audio communications, online learning tools and digital payments. 

“Whether it’s the shift to more agile, remote ways of working or the falling footfall for bricks and mortar retail as more people shop online, these changes were happening already, it’s just that now they are happening a lot faster," he says.

Indeed, there are many businesses that can use change to their advantage, and nimble smaller companies are well-placed to adapt to the new normal, seeing their competitive positions enhanced as a result, and thriving as they emerge from this pandemic in a stronger position than before.

Companies Must Keep Adapting

Jourdan points to videogaming firm Frontier Developments (FDEV) as one example of a business that's been at the forefront of digital distribution, producing popular titles such as Elite, Jurassic World, Planet Coaster and Planet Zoo.

The key factor in its business model, he says, is that these are not just one-offs but franchises. In essence, the company uses the success of a game to fund the development of other games. “Frontier spends around £10 million on a game, but the payback comes within weeks of the release, so funding the next game is very manageable," Jourdan explains. Frontier has announced plans to take on four other games in the years ahead and has set up a third party publishing division to use its already established expertise to take games to market.

It is this willingness to keep adapting that is key to success, says Jourdan, and companies which don't may not survive. He points to Autonomy, a firm at "the forefront of the industrial revolution of the digital age", which briefly became a FTSE 100 firm. The software firm did not adapt enough to compete with rising stars in the US, says Jourdan, and ended up being merged with Micro Focus in 2017. "But it should be said, it was the best attempt to create a UK software giant from the dot com boom era," Jourdan adds. 

Elsewhere, he likes online retail giant Asos (ASC) and Ocado (OCDO), which have enjoyed a pick-up in sales as people have been forced to shop online this year. Another favourite is fraud prevention firm GB Group (GBG), which made a "slow start" among the UK digital tech companies, according to Jourdan, but has since gained traction and become a major player in its industry. 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk