Investors who fall prey to the “noise” and increasing short-termism that pervades investment markets run the risk of missing out on long-term share price performance.
“If you open a newspaper, turn on the TV or load up a web page today… there’s usually quite a lot of noise rather than news,” said Luke Ward, deputy manager of Edinburgh Worldwide Investment Trust. “There’s usually something that appears very urgent going on and asking us all to think about it and have an opinion. It’s usually things that change topic every day or every week.
“As a function of this, quite a lot of investors have shortened their time horizon. The average period in the US market between buying stock in on selling it is around nine to ten months.
“We want to avoid that on our trust because we are very much focused on company fundamentals. The reason for that is over rolling five-year periods and beyond the performance of stocks follows the operational performance and the company fundamentals rather than short-term market sentiment.”
Tech toolkit
Ward is part of Edinburgh-based Baillie Gifford’s global discovery team, which focuses on investing in innovative smaller companies. Edinburgh Worldwide owns 90 to 100 businesses operating in areas like machine vision, online learning, telemedicine and robotics. Ward likes to think that each is going after a big opportunity, despite being a small business.
Speaking to an audience of Sub35 members at The Caves in the Scottish capital, he highlighted the toolkit of technologies – from connectivity and cloud computing to sequencing and new energy sources – as one of the long-term drivers of performance.
“If you think in terms of quarters or years, it’s quite hard to discern noticeable change, but if you consider where some of these technologies were ten years ago you can appreciate how much an influence they have had on the business world around us.”
A decade ago, only 10% of the UK population had a smart phone; today that figure stands at 90-95%. “That’s enabled so many large businesses to be built on the back of that consumer access – the immediacy of going direct to your consumer,” said Ward.
At the same time, the cost of genetic sequencing has come down significantly. Ten years ago, it cost $10 million to sequence a genome; today it costs $1,000. Then, 50-60 genetic cues were known for diseases; now, thanks to sequencing technology, we know of 5,000-6,000 diseases that have a direct genetic component. That is enabling companies to discover far more ways to treat diseases.
High growth potential
The structure of an investment trust is “quite helpful” when investing in smaller companies as it means he can invest in less liquid ideas. “Having that closed-ended vehicle means that [we are able to overcome] the liquidity constraints around investing in smaller companies, which often have more volatile share prices. It means that we don’t trigger any risk limits or have to deal with flows whereby you’d only be able to invest in the largest companies in your portfolio and you wouldn’t be able to spread that into the less liquid or unlisted ideas.”
The trust can invest up to 5% of its net assets in unlisted companies – a useful tool given that “companies tend to be staying private for longer and listing later”.
“If you want to make sure you still have access to that high growth potential phase, we think it’s important to have the capability to find and back those businesses as unlisted equities,” said Ward.
Four out of 94 current holdings are unlisted companies. One is Glasgow-based pioneering spacecraft manufacturer, Clyde Space, which has ambitions to have two nanosatellites circling the planet. It is challenging the monopoly that national governments have in weather forecasting thanks to developments in solar panel technology, smart phone components and data storage.
While a traditional weather satellite costs about $4 billion to construct, operate and maintain over its lifetime – “it’s probably one of the most complex pieces of machinery that humans can make”, according to Ward – Clyde Space’s nanosatellite gives a more accurate weather forecast than the Met Office for the cost of $3 million for the entire constellation.
“What was once the preserve of governments is now being done by a local business just a one-hour train ride from here,” added Ward. “When we find these kinds of businesses that’s what gets us really excited because they’ve got the potential to do something that’s never been done before.”