It has been a painful year investing in innovative companies, but it is an exciting time to put capital to work, the co-manager of Liontrust’s global innovation team has said.
“Despite inflation and slowing economic growth, innovation is steaming ahead,” said Clare Pleydell-Bouverie.
This is because innovation drives down prices for customers and operating costs for businesses, so it is a “godsend” in the face of high inflation and scarce growth.
“As long-term investors focused on high quality companies, these are the moments when we are most excited about putting capital to work.”
Necessity is the mother of invention and such counter-cyclicality in innovation is the historical norm, said Pleydell-Bouverie, citing the creation of Uber, Instagram and Air BnB after the great financial crash in 2008, as well as Microsoft and Apple being founded during the recession in 1975.
“Major innovations in recent years, such as the cloud infrastructure for storing and managing data and accelerated computing to analyse and exploit it in company operations, have opened bottlenecks across almost all industries, presenting an extraordinarily large opportunity set for innovative companies over the coming years,” she said.
These are gut-wrenching periods of plummeting valuationsClare Pleydell-Bouverie, LiontrustLiontrust’s global innovation team have just returned from San Francisco, where they met a number of companies in their funds and on their watchlist.
“Silicon Valley is currently hunkered down, as it does every few years,” Pleydell-Bouverie said.
“These are gut-wrenching periods of plummeting valuations where the excess capital that had been available to questionable projects and companies disappears.”
They are also the moments of the greatest opportunity, she added, as investing in Silicon Valley companies when valuations are depressed lays the foundation for exceptional returns on high-quality opportunities.
In 2020, multiples expanded indiscriminately and have since contracted just as indiscriminately.
“But when this process is complete, we expect fundamentals, not multiples, to drive stock returns, so a disciplined investment approach to discerning those companies creating genuine value for customers, and building strong businesses from those of more ephemeral value, will have a very good chance of delivering.”
Against this backdrop of high inflation and an incoming recession, good management teams have moved their focus from aggressive investment in growth to making their businesses much more profitable.
The evidence of this is the number of employees who have been laid off from the technology sector in the past year.
This should mean excellent operating leverage in these companies when the economy re-accelerates, Pleydell-Bouverie said.
Using Netflix as an example, Pleydell-Bouverie outlined how it laid off nearly 5 per cent of its workforce in the first half of the year, and quickly rolled out a lower priced ad-supported subscription tier to cater for its customers, who are all feeling the squeeze of the cost of living crisis.
We are closely watching the movers and shakersClare Pleydell-Bouverie, Liontrust“We think the companies that took decisive actions early on in 2022 are best poised for a recovery.
“In other words, ‘the first in will be the first out’.”
The battle for top talent in Silicon Valley is fierce, she added.
“An innovative culture is key and the high-quality companies that have it will attract the top talent that will ensure they win over the coming years.
“We are closely watching the movers and shakers.”
sally.hickey@ft.com
