Investing on the edge but avoiding the buzz – Newton’s Clay

How do you avoid getting carried away by the next big thing in tech? That’s a key question for investors as the world of edge computing becomes a reality, says Nick Clay, manager of Newton’s global equity income strategy.

Over the next 24 months, he says, as 5G starts to gain traction, we will begin to see memory and computing power move out of data centres and closer to the devices and apps using them in the real world. “It’s no longer about data centres hosting information in the cloud,” says Clay. “If you think about electric vehicles, there’s no time for information to be moving back and forth between fixed locations. Instead, data has to operate at the edge in real time. Not just cars: buildings, homes, critical infrastructure. The advent of 5G will transform how we store and use data.”

Given the likely speed of innovation in this area it would be all too easy to get swept up in the hype and bet on the next big thing, says Clay. But this would be a mistake: far better to take a discerning approach and look for the quiet winners that can deliver long-term value.

To illustrate the point, Clay describes how his strategy benefited from its investment in US tech firm Microsoft, which entered the portfolio in 2013. At the time, he says, fellow tech firm Apple was riding high and Microsoft might as well have been heading for bankruptcy given its comparative unpopularity with investors. Between 2013 and 2017, however, as cloud technology – and Microsoft’s central role in facilitating it – took off, so did the company’s share price.

In 2017, because of the sell discipline inherent in their investment process, the global equity-income team was forced to exit Microsoft – not because they wanted to – but because the dividend yield had fallen to the level of the wider market.

Today, the team takes the same approach. One avenue is to target ostensibly “old school” or “boring” tech companies – whose sleepy image belies their strategic appeal. US tech firm Cisco is a classic example. “In the fast-moving world of tech, Cisco’s been seen as something of a slow-growth dinosaur. But the reality is far-removed from its pedestrian image,” says Clay. “As hacking becomes ever more prevalent, Cisco technology is integral to maintaining secure networks and that’s reflected not just in its free cash flow but by extension its share price.”

Fundamental truths

For Clay, this approach to investing is founded on a fundamental truth: that humans are often unaware of the inherent biases informing their choices.

“There’s a litany of embedded biases that changes the way people behave – and as an investor you need to at least be aware of these,” says Clay. “Take superiority bias, for instance – that is, our tendency to think we know better than everyone else. This can warp our awareness of risk and lead to mistakes. Then, there is the Fear of Missing Out (FOMO), which I believe has driven much of the tech rally of the past 10 years. Or how about the tendency for people to overestimate the pace of change stemming from technology and innovation – but then to underestimate the ultimate impact that change will have on society in the long term?”

To counter this list of human foibles, Clay emphasises the value of consistency and an ability to think differently. “Having the freedom to be a contrarian when everyone is obsessed with the same thing is tremendously important,” he says. “But you can only do that if you have the right rules and the right boundaries in place.”

On the global equity income strategy, that means sticking to a framework that determines when a stock can be bought and when it must be sold. Only stocks yielding 25% above the market can come into the portfolio and they must be sold when the yield falls to equal or below the wider market.

“That means we miss out on most of those FOMO trades,” says Clay. “It imposes patience by default: we have to wait until the companies we like are cheap enough and then have to sell them – even if we don’t want to – when their valuations hit that cut-off point.”

For any investors, this kind of parameter-driven investing might be considered something of a burden – but Clay takes a different view. “It’s actually helpful,” he says. “Without those rules in place it can be really, really difficult to have the patience to wait until a favourite stock is appropriately priced. That’s especially so when it comes to investing in tech, where it’s always a case of the next big thing all the time forever.”

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