High tech dressed up as old economy style companies?
Mahgul Ansari, Assistant Fund Manager for the Premier Miton Monthly Income Fund, takes a closer look at the misperception around ‘old economy’ companies and highlights some of the high-end technology being developed by them.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
An ARM-ful perception?
The FTSE 100 Index is full of miners, oil majors and banks. Old economy companies – yesterday’s stories….right?
It’s easy to fall into the trap of believing common perceptions around our domestic equity market here in the UK. There are some key, albeit superficial, reasons for this: for example, only c.2% of the FTSE100 comprises technology stocks compared with a c22% tech weighting in global indices such as the MSCI World.
Popular rhetoric suggests that one of London’s big failings is that we have not succeeded in getting a major tech listing on the main market. But is that even necessary to endorse the UK’s tech credentials? Not in my view, and I’ll come back to this later.
Last month, the owners of UK chip designer Arm Holdings chose to list the company’s shares on Nasdaq, fetching a $54bn price tag at IPO. This is a hefty valuation by UK standards, but dwarfish when compared to the largest companies dominating US indices – the so called “Magnificent 7”, comprising Apple, NVIDIA, Tesla, Microsoft, Meta, Amazon and Alphabet. This group of tech stocks is undoubtedly driving a more digitised and metaphysical world around us, and judging by their share price gains over the last couple of years, investors don’t half know it.
The Magnificent 7’s large concentration in global indices almost suggests that they are the only investments which stand to profit from future technology trends. However, I believe there are more attractive stocks on offer right here in the so-called old economy FTSE100, which in my view will also prosper.
A smart revolution
Whilst using your smart phone, have you ever wondered about the tiny semiconductors powering its imaging, processing and communication capabilities? If not, let’s give it some thought now. According to UK Parliament over 1.1 trillion semiconductors were sold in 2021, with demand set to grow at 7% p.a between 2021 and 2031. This demand is driven by a growing usage of chips in numerous applications from cloud computing to the green energy transition and also robotics. In other words, semiconductors are set to become even more ubiquitous than they are today.
Less appreciated are the rare earth minerals and raw materials needed to produce not just semiconductor chips, but many other types of tech hardware, too. A couple of these materials are copper and coal, which we believe will be in short supply in future, resulting in elevated prices and larger profits for companies which mine them in our view. The UK market has many such miners trading attractively on the London Exchange, who operate globally and produce a range of highly sought after metals and minerals.
And how will future tech be powered? The Climate Change Committee anticipates that electricity demand will at least double by 2050, driven by electric vehicles and decarbonisation of heating. 70% of National Grid’s assets are focused on electricity transmission and distribution in both the UK and US, and it aims to grow its regulated asset base to about £69 billion by 2026 from £47 billion in 2022. National Grid operates in a tightly regulated monopoly and is clearly well positioned to benefit from future electricity demand.
Hi-tech dressed as the Old Economy
The idea that the FTSE 100 Index is rich with hi-tech stocks may seem absurd at first. But scratch beneath the surface, and advanced technologies are exactly what you’ll find, particularly in “old economy” industrials. The investment case for such companies is very much tied to some of the latest themes we’re seeing in the tech space – whether it’s artificial intelligence (AI), data analytics or the underlying hardware and machinery enabling Industry 4.0. Importantly they differ from the Magnificent 7 in some keyways.
Firstly, they tend to exhibit defensive rather than disruptive attributes, and provide mission critical solutions and services to both public and private enterprises rather than consumer discretionary products. Secondly, they are more evenly diversified in terms of product categories and geographical markets which further de-risks their business models.
Let’s look at a few examples. BAE’s shares have had a good run since the Russian invasion of Ukraine, however prior to that it was perceived as a low growth clunky defence stock. What’s less well known about BAE is the highly sophisticated technology it is working on in partnership with universities, for example, wearable cockpit technologies, which should make jet pilots’ lives easier. Fighter jets collect a vast volume of data when in the air, which can be overwhelming for their pilots who strive to balance combat efficiency with their health. To help resolve this issue BAE is developing new helmets and devices to help pilots gather and process information more easily and effectively when in flight.
BAE is also using AI to develop autonomous capabilities within jets, as well as eye tracking technology which could enable pilots to control their aircraft with the “blink of an eye.” I am no tech expert but to me, this seems as sophisticated as any wearable device in Apple’s catalogue, yet the valuation disparity between BAE and Apple is stark.
Another UK technology leader worth highlighting is Smiths Group, which has enjoyed strong market positions in several niches for over 170 years. Smith’s recent innovations are partly thanks to its older ones, given the company’s propensity to capitalise on its existing technologies to solve problems in an entirely different application. For example, CT scanning, which employs advanced X-ray technology, was initially used in Smiths’ former Medical unit, however this was recently extended to airport security systems and high-volume air cargo screening. Smiths is also innovating green technology solutions within its energy and industrials unit, John Crane. Green solutions include upstream pumping seals used in water intensive industries, which save customers an average one million gallons of water per seal per year.
Frankie says RELX
RELX is now the 11th largest company in the FTSE 100 Index after having transformed itself from a print heavy business into one which is predominantly electronic. They are increasingly a provider of tools and analytics as they transform their ‘big data’ into a format which is easier for their consumers to access.
For example, more than 85% of new US auto insurance policies used RELX’s risk analysis in 2021. Also, within their risk division, their Cirium business tracks 97% of flights globally in real time. Soon RELX will launch the LexisNexisPlus, an AI product for law firms which will recommend references and citations to strengthen legal arguments among other impressive tools.
You do not have to look far down the list of FTSE 100 Index constituents to spot other unsung tech heroes. Engineers Spirax Sarco, Halma and Renishaw all have proven histories of high-class technology offerings, matched with attractive returns.
Distinctly the right one
Against a challenging backdrop, we remain confident that the approach we use in the Premier Miton Monthly and Optimum Income funds is distinctly the right one. Our focus on ‘quality at a reasonable price’ means the technology companies we hold in the funds have been selected based on their defensive attributes, broad diversification, and evidence of a durable competitive advantage which has stood the test of time.
The companies we invest in also have a history of dividend growth which we feel is particularly important in the face of high inflation, and resilient balance sheets offering the potential to buffer economic volatility.