The Power of Thematic Investing

by Nomtha Ngumbela

In recent decades, technological advances have transformed the manner in which businesses conduct their operations, communicate with consumers as well as the manner in which products and services reach consumers. Consider the consumption of entertainment; previously cable tv schedules were inflexible, if a user missed a line of dialogue or an opening scene the only reprieve available was the show’s next viewing time which could be days if not a week away.  Similarly, access to information was hoarded in libraries or on Microsoft Encarta, a CD-ROM indexed encyclopaedia which required an annual subscription. (The last version of Encarta interestingly enough was released in 2009)

Companies spent hundreds of thousands on non-integrated hardware which often took up entire rooms or even floors of office space.  Rental of movies, advertising on vehicles and dial up internet are but some examples of industries which have been disrupted, transformed or even eradicated due to technology. 

Companies that have stood the test of time have adapted through growth and scale, harnessing/integrating technology into business models to ensure sustainable and robust earnings profiles. With an acknowledgement that consumers are not likely to fall out of love with technology in the near term, Effectus Capital Management has incorporated companies leveraging the tech trend into the new ECM Growth and Innovation Fund.  

In the upcoming research series, we will interrogate the commercial sustainability of emerging global themes and trends as well as the companies we believe will most benefit from new age technology and survive the changes in the technology hype cycle. 

Investment Process

Understanding which themes are investable and sustainable is core to our investment process. Knowledge of certain basic concepts is therefore required when investing in the technology sector:

  • Understanding the typical technology adoption cycle and recognizing that the rate at which new technologies are adopted is increasing at a hyper rate. Knowing where we are in a technology cycle impacts the risk profile and size of the potential growth opportunity.
  • Understanding the size and scope of the total addressable market (TAM) of an opportunity set or company how far towards saturation point it is (for example desktop computers vs cell-phones vs electric vehicles vs home automation systems.
  • Understanding the power of the network effect. A network effect is any situation where every new user joining a service provides benefit to all the users already there, and even more so, gets back value from the existing users. Network effects are going to be as dominant on emerging technologies as they were on PCs and mobile phones. 
  • Understanding which new innovations and trends are investable game changers,and which are not. One of the ways to assist in this key insight is to keep an eye on the venture capital (VC) market and start-up trends.

With this in mind, 9 themes were investigated, namely;

Financial Technology Big DataArtificial Intelligence (AI)
RoboticsCloud ServicesThe Internet of Things (IoT)
Cybersecurity5G Technology Semi-Conductors 

A high-level overview with real world applications of each theme is illustrated in upcoming chapters which will provide the reader with a sense of the possibilities and at times, the new future we are headed towards. The characteristics, application and forecasted growth trends within each of the themes is also explored. None of these themes operate in isolate and neither do their growth trends thus instances of convergence are too be expected. 

With an understanding of each theme in mind, the series will then move to an analysis of specific investable opportunities identified by ECM. These global companies have been selected to illustrate potential stocks which could form part of the fund.