Investing in the future

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The digitisation of the economy is challenging investors’ assumptions about growth and value says Lucy Macdonald portfolio manager of the £425m Brunner Investment Trust.

She says that digitisation is leading to a polarisation of performance of firms within a host of sectors.

“You’re seeing more of a divergence in corporate performance and share prices as a result of this [digital] shift. We need to be on the right side of that. The divergence is one of the reasons why growth versus value is shifting in different directions,” she says.

The lower discount rate and low interest rates clearly has an impact as well but digital may be marking a permanent shift.  

“Companies, which traditionally might have underperformed and then advanced up, are just never recovering, because these are structural changes. If they’re not on the right side of these changes, it’s not going to happen,” she adds.

The trust takes a bottom up stock-picking approach so it doesn’t select the trend first and then select the stocks.

It does hold Accenture “a direct beneficiary of this trend, because they are providing the services of digital transformation across verticals, industries, and geographies”.

Yet digital is at play within many other holdings.

“When you’re looking at each sector, they’re all shifting in same direction. It’s just a question of time, where they’re starting, what the maturity is of that trend.

“We are looking to see where the growth is coming from and making sure that we’re benefitting from it. You can get an acceleration of growth, an improvement in productivity and some valuation upside as well, if the market then understands what’s happening to the business.”

This is strongly as play with industrials.

“It’s the whole industrial revolution all over again. These are companies using technology to drive the top line by increasing sales and service through technology. It also improves the quality of their business because they have more data about their relationship with customer and the customer relationships are becoming more ingrained and stickier. You are getting more pricing power, better margins, and a more service-like approach.”

It is also a huge factor for many consumer stocks. Online is the fastest growing part of Adidas’ business, which is also the trust’s biggest contributor to performance in the year to date.

Does the board have digital skills?

MacDonald says that it is also shaking up their approach to assessing boards and management within firms.

“We’re still working our way through this, but we are looking at board composition these days. You need to have digital understanding digital skill on the board. If the CEO is not of an age where you generally understand these things, they need to have somebody on there who does. When you’re assessing the board, you’re assessing their digital skills.”

Brunner, which is in the Allianz Global Investors stable, makes much of its research capability which includes using Salesforce Chatter to connect its investment team and global researchers. It also incorporates significant outside research.

She says this sheer scale of technological disruption cements the case for using active management and the need for research.

Passive more dangerous than ever

Indeed, passive investment, in her view, is therefore more dangerous than ever.

“It means that there is more of a role for active managers. It seems to me that this is the time when you’ve got to be anything but passive. You’ve got to do more research, you’ve got to be more active, to understand what’s happening, because it’s new. It isn’t business as usual. So being a completely passive seems to be more dangerous than ever. Because there is such a lot of change.

“It’s one more reason why you want to be really focusing on deep dive research. It may be that you still don’t exactly understand what’s going on, but you’ve got a better idea and then you can price risks and opportunities better. If you don’t understand them, you can’t price them.

“If you are a machine, and you’re just picking stocks, which appear to have a low price to book, but the book is being completely sort of transformed or completely out of date, then that’s going to not get you anywhere.”She says we should be putting more into research and into understanding what data means and also improving the productivity of your research through technology.

The trust is now benchmarked against a composite measure of 70% FTSE All-World ex-UK and 30% FTSE All-Share indices (previously 50:50) and last year repaid two high-cost debentures, which have been replaced with significantly cheaper debt, resulting in a much more straightforward capital structure and increased financial flexibility. The trust share price stood at 866p per share with a net asset value per share of 936.3p as of 17th June.

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