We are living in one of the most noteworthy periods of change in history. The internet and the digitization of nearly everything have created some massive new industries.
In the scientific space, the mapping of the human genome at the beginning of the century has yielded new ways of treating some of our most challenging diseases, including Covid-19.
Our philosophy is focused on durable structural change. We don’t follow cyclical trends, instead the central themes in our investment strategy are for the long-term. As we head into 2022, we are not looking to what excites us just for the year ahead, but what excites us over the next 3-5 years.
Alphabet, Facebook, Amazon, Mastercard and others in our Invesco Global Focus Equity Fund, are great companies with deep intellectual libraries and formidable network effects.
There is nothing temporal or fleeting about the size and scale of their advantage, these companies have created, or are operating within, economic ecosystems that have expanded structurally.
Perhaps the most important thing to understand about networks is that, once entrenched, they can only be displaced by the creation of an entirely new one. That’s a tough task. People are on Facebook, Google and Amazon because everyone else is, too.
Meanwhile, credit cards were the earliest iteration of digital payments. There are now a myriad of ways to send money to people to pay for things online or in a store. The use of these by consumers is only going to increase.
IT departments are planning to move much of their software from an on-premise platform to the cloud, facilitated by Amazon Web Services and Alphabet, along with other players in the world.
This is no small thing. It represents a huge shift in the IT stack that has a long way to go. Software in the cloud rids the enterprise of some of the big capital outlays and a lot of hardware that is costly to maintain. The best innovations, the ones that represent a structural shift, always deliver an outcome that is both better and cheaper.
As a part of the move to the cloud, cyber security in enterprises have undergone an overhaul. Instead of only having to secure a single premise, there are now a myriad of endpoints, and many things running in the cloud. This means a different toolkit is needed for network security.
That is a big evolving field that is growing in importance as networks get distributed and their workloads shift to the cloud. CrowdStrike has built the first fit-for-purpose cloud-based security software. It is not an adaptation of legacy on-premise software, it was designed to secure modern network endpoints, and modern threats and it is growing very rapidly.
The chart below shows that the growth of spending on security is significantly outpacing the growth of IT spending overall, a trend which should provide a continued tailwind for CrowdStrike in the years to come.
Source: Bloomberg Intelligence, IDC
Elsewhere, the mapping of the human genome completed around 20 years ago has created new opportunities for drug development and clinical research.
We are now seeing its impact, both in the method of drug development and clinical research. The development and manufacture of the Covid-19 vaccinations is a direct result of that. The virus was quickly genetically sequenced on an Illumina sequencing machine, enabling it to get to market fairly rapidly by customary standards. Normally, commercialising a medicine usually takes a few billion dollars and 10 to 20 years to come to fruition.
We are, however, in the early stages of this theme. We have chosen to invest in companies such as Illumina, diabetes giant Novo Nordisk and Thermo Fisher Scientific, a provider of a wide array of diagnostic and lab equipment sold to research labs, hospitals and the biotech and pharma industry. Each is the leading global player in their respective arenas with strong intellectual property rights and substantial long-term opportunity.
The market narrative in 2021 was all about the cycle, even though there are some profound changes happening all around us. The thing about cycles is that they are just that, they are passing, reflecting a temporal change in preference.
Structural change, of the sort we look for, is much bigger than that. It doesn’t separate the world into cyclical or defensive, it separates it into winners and losers, and the losers fade into obscurity.
The portfolio we hold today was not assembled to perform only in a tailored environment. What drives our holdings isn’t complicated. Their growth rates and economic profitability have been going up together. The market is what it is, but we are invested in a portfolio of 35 businesses, with each holding a significant competitive edge in an expanding economic ecosystem.
Many pieces we read from the ‘outlook’ genre touch on subjects that keep the writer up at night, or challenges they expect in the year to come. The truth is, for us, there’s not a lot that scares us as we head into 2022 or the years that follow.
While negative headlines may drive a few bad weeks or a few bad months for your equity portfolio, they shouldn’t scare you as a long-term investor. In fact, negative headlines often create the temporary pullbacks in stock prices that can set you up for fantastic long-term returns in the years ahead.
In our years, we’ve seen all manner of inflationary scares, geopolitical tensions, terrorist attacks, currency crises and the like, but none of them have mattered to generating long-term returns for our clients.
As those that follow our strategy may recall, what we think matters most is buying durably advantaged companies at the right price, run by management teams we can trust to do the right thing with shareholders’ money. If we can find opportunities like that and invest in them with conviction, good outcomes will follow over a 3-5 year investment horizon. The rest is just noise.
The 2025 equities outlook is improving. Balance sheets look healthy, and many stocks are attractively valued, though geopolitical risks remain. Find out more.
Markets were relatively volatile during the quarter, with investors being pulled between the negatives of geopolitics and weaker industrial demand, and the potential benefit of lower interest rates.
Better inflation data prompted a strong start to the quarter, however, there was a sharp sell-off in August as positivity around interest rates was swamped by fears of a US recession. These fears gradually dissipated, and markets largely recovered by the end of the quarter.
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The fund may invest in certain securities listed in China which can involve significant regulatory constraints that may affect the liquidity and/or the investment performance of the fund.
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