Welcome, everybody, and thank you very much for joining us for this, our second European Equity’s webinar with Dominic Wallington, head of European Equities.

Dominic, we talked about technology recently, so I suppose the question is, why are we focusing on it again?

Yeah, so we talked about the fact that we felt that technology was driving stock markets.

And that was despite the fact that most investors, most commentators were obsessed with following macro signals, trying to understand where they are in the economic cycle. And much of the thinking that surrounds and supports financial economics is about reversion to the mean.

But we were making the point that sometimes the winners will draw away and the losers will continue to lose, and this was especially likely during a revolution of some kind—a technological revolution. And we are undergoing that at the moment.

But we believe that there’s still much more to say. We believe that what’s happening at the moment is still being underestimated and there’s still a lot of confusion.

So you and I have talked about this before, but there seems to be an element of what I suppose you could view as underestimation with regard to technology. And I’ve sometimes seen it referred to as Amara’s Law, although as with all these things there are many different names for it as well.

But effectively it states that we tend to overestimate the effects of technology in the short run, but we underestimate the effect in the long run.

Do you think there’s a clear answer as to why that is?

Yeah, it’s a good question. It’s a nice example. And I don’t honestly know the answer to the question, other than this sort of latency that we tend to see. But I think there’s something else that’s going on at the moment, and we’ve tried to look at historical parallels in order to try and explain this, and to understand it ourselves.

And it’s really interesting to know that until recently, it was believed that classical antiquity, those civilizations that occurred in the classic era, they didn’t use technology particularly well. And when I’m talking about the classical era here, I’m actually thinking about it from a Western perspective, so I’m thinking about the Greeks, the Hellenistics, the Roman Empires.

And the conclusion that people have come to in terms of understanding why the impact of technology, the use of technology was underestimated during that period of time is that those historians who did that had looked through the lens of the industrial revolution.

So they had this notion that everything that had impact was material. It was about building things. It was about planes, and automobiles, and trains, and factories, and machines. And obviously the Romans had aqueducts, they had roads, they had military technology, but much of the technology that had a dramatic impact during the period of antiquity was actually idea based. It was information based.

So it was the development of alphabets, of geometry, of stenography, which really created change. And the current technological revolution is similar in many ways. It’s dematerialized. It’s information lead. And perhaps it’s being underestimated for similar reasons.

There have been a lot of leading economists in the U.S. who’ve talked about secular stagnation. There have been lots of people in our industry, fund managers who allocated portfolios incorrectly as a consequence of an underestimation of what’s going on at the moment.

And we think again it might be due to looking through the lens of the industrial revolution.

So, yeah. Well one of the stories I keep coming back to in this context, as you put it the physical versus the dematerialized, is the Genome Project. And after the first sequence in the genome was completed, the U.S. and indeed actually the UK government as well, released a number of statements making some pretty bold claims that this was you know a breakthrough for mankind and we were going into a new era, and bold frontiers, and other things like that.

But it’s interesting to note that it’s only now, 20 years later, that the real sort of impact, if you like, is starting to be felt. And you look at the effects of genomic medicine on oncology, and pharmaceuticals, and rare disease I suppose as well.

Yeah. So again a good point. And I guess it harks [backside] to your point about Amara’s Law.

When there’s latency, when the impact comes through later—and especially I think when we’re talking about something that you can’t see, you can’t drive it, you can’t be a passenger in it, you can’t use it on a daily basis, then people have a tendency to move on or to give up on it, and to underestimate the impact of it at some later stage.

Yeah. What may be unique about it, and we always try not to say things are unique or different this time, but the shifts that we’re talking about and that we’ve looked at are now coupled with a very different but an equally seismic shift of sustainability broadly.

You know, the macro level we’re seeing at the moment, the policymakers are going to increasing levels to try and implement this. If you just look at the last couple of weeks and the recent carbon targets that have been announced by China and the EU.

And I suppose the question is, if there is at least this chance of a macro sustainability trend, it is potentially complemented I suppose by what you have been looking at, which is far more at the micro level.

And there’s that oft trotted out statistic that today’s iPhone contains more processing and computing power than the first ever space shuttle, which you know is interesting on one level, but perhaps more pertinent is how this folds into the discussion on sustainability more broadly and its potential benefits as well.

Yeah. So to your point on the cell phone, the energy density of new technology, electronics, is much higher than anything we’ve seen before. But I also think it’s about the fact that we’re much more aware of the impact of our technologies now than we have been in the past.

We’ve seen the impact. It’s something that is not something that can be ignored. And I think much of this is to do with our ability, our power to scale things up, to produce in huge quantities. Plastics is a key example of this. It’s choking the ocean because we can produce it at such scale. And when the industry was founded, I don’t believe that that was something that was foreseen. It was never understood that we would have this power to produce in such quantities.

And above and beyond that, when Thomas Newcomen developed his new boiler that essentially kicked off the industrial revolution, I’m pretty sure he wasn’t thinking when he fired up the coal to produce the steam that it would affect the environment. That the gases produced would change the climate. He just wasn’t aware of this.

So we are in a different position. We have the insights. And we’re also developing alternatives as a consequence of the fact that we have the insights.

And not only this, not only the fact that we understand these things a bit better, but also we have better control, I think, better audit trails than we had before. There are 7 billion internet connected devices now, some of them are sensors, some of them are cameras, but they’ll enable us to look at supply chains and manufacturing processes, and to control them in a way that we haven’t be able to do before.

And to ensure that these processes are subject to the regulations imposed by governments and also by the requirements of consumers who are interested in sustainability.

Yeah. It’s an interesting point we often overlook, don’t we?

So coming back to your earlier point on the sort of informational side of it and the informational revolution, could we be going through that as well at the moment? As well as a sort of technological piece?

Yes, I think this is very much an information revolution. And what is interesting is that many of the technologies that we have now will be of the enabling kind.

Yeah. So electricity is like classic enabling technology, isn’t it? And, you know, if we go back again, using historical examples, it meant that large-scale factory production took off and many new products were created. And we’re all the way from sort of the car and mass transportation to nowadays with, again, using the modern mobile phone.

Yes. It’s a good example. And I think the enabling element of technology this time around, that bit that’s not seen, that’s not heralded, will be very much about reducing the frictions and the costs between businesses. Between business to business, but also between business and consumer.

Yeah, which is IT that’s performing that function now. Everywhere we look, technological developments are accelerating because, as you say, innovation tends to build on innovation.

And looking back historically—I didn’t know this—improvements to the design of clocks inspired better windmills, and mechanisms invented for organ making were applied to looms. And then ultimately, mechanisms and looms became computer software.

Yeah. So I think people are often not aware of the springboard that one technology provides for the next. And not only that, but technology finds new uses.

To go back to your point about electricity, it was used in one of the technological revolutions that started in 1875 on the basis of localized networks that enabled people to build factories and have them be much more productive than they had been before.

But it was also used in a different way in the next technological revolution kicking off in 1908 as a universal utility in many developed markets. It was used not only by business, but also in the home. And created lots of innovation as a consequence to the fact that it was available there.

We sort of hate to put numbers on things because you always inevitably—they get caught out by that, but from what we’ve seen, these types of cycles tend to take about sort of 50 years to mature. Is that right?

Yeah. I think that’s true. Many of the important individual technologies have run in cycles of that sort of duration. Canals. The railways had a bull market of about 50 years after they were introduced in 1829.

But it’s also possible to see the industrial revolution perhaps as one thing that’s been going on for hundreds of years, and the discreet technologies and themes drop away if you do that. But it was obviously something that was driving growth.

And then again you can go back, and you can say that there are discreet technologies that have had much longer cycles than 50 years. You mentioned electricity. We’ve talked about it a bit. But again, if it kicked off one revolution in 1875 and then another in 1908, which probably lasted 20 years, 30 years, then we’re probably talking about a duration of a minimum of 70 years or so.

And if you measure that against the information revolution that people believe started in 1971 with the introduction of transistors, the miniaturization of electronics, then we could have some substantial period of time elapsing before that has matured.

And again, you know that one of its major tools, the internet, it’s only really been in its current form for 25, 26 years. Only 10 years ago this webinar would have been very difficult to organize and undertake. And think about this terrible pandemic. Commerce would have ground to a halt. The idea of working from home would have been impossible because we just didn’t have the technology.

But either way, however you look at it, you’ve got to contextualize it against the average stockholding period in the USA being less than two years. How on earth can you understand and benefit from these dramatic, epochal changes, if that’s your area of focus, if you put it down to two years.

And this leads us to an area of conflict I suppose that we see here, which is that, how as investors can you truly understand how things are changing? And also, just as importantly, what the impact of this change is going to be if you have that short-term investment time horizon? Or that’s the game that you’re playing.

And perhaps, just as importantly, the mindset you’re bringing to ownership. You know, we have a team, and one thing we’ve experienced over the years is that added importance of engaging the management on those long-term trends and the strategic issues. And that in turn has fed a positive feedback loop into our understanding as investors.

So perhaps we can wrap up then with a question which possibly much of this discussion has led people to, which is, are we in essence or have we become technology investors?

Well not entirely. I mean obviously it depends on how you define technology. If you define it within the category of the information technology sector within the marketplaces, then that sector has obviously performed exceptionally well during the last 10 years or so. And if you cycle back to May of this year, May 2020, then the U.S. tech sector was bigger than the entire European equity market.

And it’s possible that markets can get out of step with what’s happening in Main Street, but we think this is probably a powerful message about how substantial, how enormous this could be, rather than it being a signal of a bubble.

As we’ve mentioned earlier on, you know tech is accelerating because it’s cumulative. It’s building on other technology. And it’s not just within the IT sector, it’s happening in all sorts of different fields. So we look at biotech and pharmaceutical industries, and we see the growth of personalized medicine, the switch of production of drugs on the back of chemical entities now moving into complex biologics.

And we see a sort of diffuse impact of the IT sector in the sense that it’s now possible to sell coffee, or luxury goods, or sneakers, whatever it is, direct to the consumer through the internet. And this is to a great benefit of the producer of those products but also to the customers, but is hugely disruptive to the traditional retail sector.

So the IT sector has done very well. We’re not exclusively IT investors. We are technology investors in as much as it crosses every branch of commerce and all fields of human endeavour. And whenever we look at a new idea in terms of putting it into the portfolio, we ask the question, how will this be affected by technology?

And there’s a potential negative point in there I suppose from an investment point of view that if indeed technology does precede by destroying itself, self-destruction, new technologies make older ones redundant, and there are always these risks inherent involved in investing directly in technology as a consequence.

One of the antidotes that I know you have discussed before to this self-destruction and something with an underlying stability is branding.

Yes, you’re right. Technology moves forward by killing itself if you will. It makes itself redundant. And the way that—so investing in technology is fraught with problems because you might not see these things coming.

So one of the ways that we overcome this is by having a major portion of the portfolio invested in brands, many of them consumer brands. And brands are theoretically able to exist in perpetuity. It’s not just theoretically. There are a number of Japanese companies which are around about 1,000 years and many of those are built on branded services.

So we look at this in two different ways. We look at it in terms of the demand dynamic, which we think is very positive. We still think there’s probably another 1.8 billion people who will join the middle classes within the next 10 years or so.

And then secondly we think about it, as I’ve mentioned before, where brands if they’re nurtured, they’re very difficult to dislodge, disrupt, or make redundant.

And I remember in 2016/2017, many people were saying that the internet had democratized product. That the power of brands would fall away as the power of the internet interceded. And the problem is that these people who thought that hadn’t taken into consideration the fact that there’s too much stuff. There’s too much information, there’s too much choice. And rather than that being a positive thing, it leads to paralysis.

And the only way out of this confusion is trust. And brands are something that you can trust. It takes a long time to build the trust. You have to be very good in order to develop it. But once you have it, we think it’s incredibly powerful. In fact, brands are probably worth more now than before, as a consequence of the internet.

So if it’s information you’ll go to a source that you trust, that you think is edited or curated properly. Whether that’s a newspaper or a podcast or a website. But if it’s product from a consumer perspective it will be about brands.

So I’ll give you a couple of examples just to flesh this point out. Nestlé’s KIT KAT has been around since 1911, it’s been something that’s had brand extensions that haven’t diluted the worth of the brand. But if a new four-finger chocolate treat was introduced by somebody else, it would just be seen as derivative. It wouldn’t be seen as an alternative.

And then another example, which I have given before but I think it’s very powerful, a great way of thinking about the power of brands, is a brand owned by LVMH, the House of Moët, which is obviously a champagne. And it’s not replicable. You can’t supplant it by something else.

You saw VHS giving way to streaming, you saw whale oil supplanted by kerosene, which itself was supplanted by electricity. But you can’t supplant champagne. It’s controlled by a body located in Champagne that dictates who can become a champagne. And it has to be in a certain geographical area. So you could perhaps produce a fizzy wine elsewhere and make some success of it, but you’d never have the cachet of Moët, which has been around since the late 1700s. And most importantly, it would never be a champagne, it would just be a fizzy wine.

I think that’s a great way of encapsulating the power of brands, and there are many brands that have these sorts of characteristics and this is why they make great long-term investments. And why we still believe they’re better than technology over the longer term.

Well, it seems like a very positive point for us to conclude on. So thank you very much, Dominic, and thank you to everyone for joining us this afternoon.

Thank you, Freddie.