What’s next for tech and how can investors benefit?

Technological advances throughout history have fundamentally changed our work and lifestyles. In recent history, we can identify periods in time when advances were large and profound enough that we think of them as industrial revolutions.

First, we had the introduction of steam power in the 18th century, followed by the adoption of electricity in the 19th century. More recently, the third revolution is commonly associated with the adoption of computers and computer programs.

That brings us to industry 4.0, as it’s known. Building on the third revolution, it involves the expansion of our automation and digitisation. With new technologies available to businesses, many are either at the forefront of innovation or are introducing new technologies to improve their processes or offer new services.

As an investor, change and innovation offer exciting opportunities. We think there’re two key areas set to thrive from new technologies and changing digital demand.

This article is not personal advice, if you’re unsure whether an investment is right for you, seek advice. All investments and any income they produce can fall as well as rise in value so you could make a loss.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

A new world for healthcare

Rising expectations around the globe for effective, cheap and easy to use healthcare systems mean the industry is constantly under pressure to adapt and improve. Technology and innovation are changing the way we engage with our health and expanding the range of treatments on offer.

Smith & Nephew is a medical device maker operating across Orthopaedics, Sports Medicine and Wound Management. Innovation is at the heart of the business’ strategy. It's spent $171m in the first half of 2021 to deliver new technologies and products to healthcare professionals.

The group already offers a range of robotic assisted surgery tools for knee and hip replacements. And it recently announced the purchase of US-based Engage Surgical, whose treatments are expected to benefit from robotic integration, provides a perfect example of merging new technology into existing processes.

For Smith & Nephew, that helps expand their operation in an area where sales lagged over the pandemic, when elective surgeries were put on hold. With treatments back on the table, there’s opportunity to not just recover but grab market share in the process – especially if the group can offer better technology than its peers.

There’s no doubt the pandemic accelerated a range of technological advancements in the healthcare industry. Gone are the days where the only way to contact your GP meant waiting on the phone from 8am and heading off to the traditional four walls of the doctor’s surgery.

Telehealth services provide virtual healthcare services to patients, from ongoing support to on-demand urgent care. The market’s been growing rapidly, expected to increase from $70.5bn in 2020 to $598.2bn in 2028.

Teladoc Health is a leading business in the arena whose total members grew off the back of the pandemic. Estimated to come in around 76.5m for 2021, an increase of 37% in the past two years. That’s provided a welcome boost to underlying cash profits, estimated to be up over eight times pre-pandemic levels for the 2021 financial year.

Teleadoc total US members

Source: Teladoc investor presentation – January 2022.

Now we’ve normalised, user growth will likely slow as customers regain access to in-person GPs. That’s to be expected, and it’s an area where we still expect demand to continue growing in the long term. Of course, exact demand patterns are very tough to predict as the world gets back to normal.

That makes it especially important to point out that the group’s yet to turn a bottom-line profit. This adds a layer of risk. While we understand the long-term investment case, investors would need to be prepared for the ups and downs that come with investing in a pre-profit company. That also makes the group harder to value, but looking on a price/sales basis, it’s some way below its longer-term average.

Ultimately, investors should be paying attention to healthcare as a technology option. We expect the healthcare sector at large to be a benefactor of industry 4.0, as new technologies pave the way for novel treatments and new ways of accessing healthcare.

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Into the clouds

For most of us, the use of cloud computing is completely embedded into our everyday lives – even if you don’t realise it. Cloud computing is used in everything from individuals sending emails and streaming movies, all the way up to corporations and governments storing and analysing data.

Simply put, the modern world as we know it wouldn’t exist without the use of the cloud. With that brings a huge addressable market, expected to be in the region of $1 trillion by 2026. That’s a big opportunity for businesses providing cloud services, and therefore investors.

The cloud space is dominated by three main players, Amazon Web Services (AWS), Microsoft Azure and Google Cloud.

AWS launched 15 years ago and has since turned into a powerhouse of growth. Since Amazon started reporting AWS individually in its earnings back in 2013, revenues have increased six-fold. More impressively in 2021 the division, while only accounting for 13% of total sales, delivered almost 75% of operating profits.

AWS revenue ($bn)

Scroll across to see the full chart.

Source: Refinitiv Eikon, 20/2/22.

One of the benefits of operating a cloud business is the fundamentally high operating leverage. All that means is once enough users are in place to cover the upfront costs that come with setting up huge IT infrastructure, each new user feeds almost directly into profits. That’s one of the reasons AWS can boast operating margins of almost 30% and makes the business model very attractive.

Cloud computing was already a part of everyday life and that’s not likely to change anytime soon. If anything, changing behaviours as a result of the pandemic, like increased working from home, should cause demand for cloud services to increase.

But there are some challenges to overcome. Data security is a main concern for businesses looking to adopt cloud solutions, and it’s an area cloud providers are having to invest heavily in to try and appease customers.

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Fund ideas for investing in technology

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

AXA Framlington Global Technology

Jeremy Gleeson, lead manager of the AXA Framlington Global Technology Fund, invests in companies that research, design and develop technology across all sectors. Around 89% of the fund is invested in the United States, where he typically targets companies with quality management and high growth potential. This can include investments in higher-risk smaller companies.

The manager believes a long-term view is key to success. The fund’s grown 528.87%* over the past ten years, versus the IA Technology and Telecoms index’s 422.71% gain. This isn’t an indication of how it’ll perform in the future though. More recently, the fund’s been under more pressure. Demand for some products and services in the technology sector has dropped as economies have started to re-open and inflation has accelerated.

The managers avoid higher-risk start-up or ‘blue sky’ companies. They believe these are largely unprofitable and tend to disappoint in the early stages. The investments in emerging markets offer the potential for higher returns, but also increase risk.

Read our latest update on the fund

Past performance is not a guide to the future. Source: *Lipper IM, to 31/01/22.

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AXA Framlington Global Technology Key Investor Information

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Rathbones Global Opportunities

James Thomson, lead manager of the Rathbones Global Opportunities Fund, invests in companies across the globe, primarily focusing on developed markets like the US, UK and Europe.

The managers invest in companies they consider to be under the radar or those that have been shunned by other investors, but still have potential to grow over the long term. Larger, more established companies make up the majority of the fund, but they can invest in higher-risk small and medium-sized companies too.

The fund invests in a range of sectors, including healthcare and financials. It also has around 23% invested in technology and telecommunications companies, including semiconductor manufacturer Nvidia and online advertising giant Alphabet.

The managers prefer to avoid companies with lots of debt and those whose fate is tied to the health of the wider economy. They also have the flexibility to invest in higher-risk emerging market companies, but tend to avoid this area due to concerns around corporate governance.

Since Thomson started managing the fund in November 2003, he’s delivered some outstanding performance. The fund has grown 896.21%* over this period, compared to the FTSE World Index’s return of 510.24%. As always, past performance isn’t a guide to future returns. There will also be times the fund falls in value, so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM, to 31/01/22.

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Unless otherwise stated, estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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