Smaller-companies focused fund house Amati is set to a launch a new fund on May 23. We spoke to Mikhail Zverev, one of the managers of the TB Amati Strategic Innovation Fund, about what the “i” word really means.
Here are his key takeaways on innovation:
"It’s complex, it’s technical, the consensus doesn’t get it all the time," he says.
Investors chase stocks like Tesla but often overlook companies like VW and Infineon, which can benefit from the EV revolution. This creates opportunities for fund managers who can pick out the unloved stocks in a growing sector. This also applies to sectors too: Zverev says that nuclear energy and defence are highly innovative industries, but less glamorous than tech of healthcare.
Don’t just follow the pioneers
Investors often focus on the “pioneers”, the companies that make the original breakthrough. But the “enablers” and “adopters” can equally provide decent returns as these companies help server the pioneers, and bring the original innovation into the real world. Enablers, for example, supply “the picks and shovels, services, tools and ingredients that help deploy that innovation", Zverev says.
Apply the innovation test
He says the "innovation test" has to answer three questions.
1) "What difference does this innovation make? Does it improve functionality, does it improve economics?"
2) "Is it already here?"
3) "What is the size of the market that this innovation addresses?"
Check the license to innovate
A company may have a great product or service but it needs to have a market for it and the scope to put it to everyday use. "What gives the company a right or opportunity to extract value from this innovation?" is one of the key questions Zverev asks of a prospective investment.
“We want an innovation to be practical enough to make a difference today and be commercially implemented today, just not ubiquitous yet.”
Innovation can be costly - and risky
Companies can make technological or scientific breakthroughs but their fortunes depend on that becoming a commercial success. Sometimes this doesn't happen. “Just by getting the science right, you don’t get rewarded as a investor," he says.
"Transformative innovation can be risky, both financially and technologically, you often go through periods of consistent loss making and cash consumption,” Zverev says. Focusing on stocks without this single product risk may have a better risk/reward ratio, he says.
Leave the future to the futurists
The market can often be focused on "moonshots" like self-driving cars and space travel, ideas that capture the imagination but maybe have long payoff times. “We think we understand what the future looks like and it’s already here," he says. "We are not trying to imagine the world in 10 years' time."
The UK can rival Silicon Valley
We could even be more well rounded than the the famous Californian centre of excellence. He cites life sciences, specialist industrials and materials sectors as key to the UK's appeal. But “investing in UK smaller companies needs to be done with a global perspective”, he adds.
