Identifying innovative companies that can grow into the ‘giants of tomorrow’

Guy Feld, Manager of the Marlborough Global Innovation fund, explains what he looks for when selecting companies for the portfolio and why he believes the equity market sell-off has created an exceptional long-term opportunity.

Innovation is gathering pace around the globe. In the US alone, the number of patents in force more than doubled from just over 1.6m in 2004 to more than 3.3m in 2021, according to data company Statista.

This acceleration in innovation is being driven by advances in technology, by companies putting technology to work in new and creative ways and by businesses with distinctive intellectual property bringing fresh thinking to a range of other sectors.

We seek out exceptional companies driving innovation in a broad range of high-growth areas. We invest in outstanding technology companies, of course. However, focusing purely on this sector would severely limit the number of opportunities open to us. We are keenly aware that human ingenuity and innovation are not just confined to the realms of silicon chips and software. So, our investment remit is far wider.

The companies we invest in are at the forefront of powerful waves of change that range from water conservation and recycling to digital transformation, often known as DX. DX is the global trend in which companies and public sector organisations are replacing out-of-date technology with far more effective digital processes.

In addition to investing in today’s megatech corporations, we select companies around the globe that have the potential to grow into the giants of tomorrow. We hold a high-conviction portfolio of between 25 and 50 stocks and at least 50% of them will be smaller companies at the time of initial investment. While these smaller companies can be more volatile, we believe identifying outstanding businesses at an early stage can provide very attractive opportunities.

In the fund we hold a combination of established innovators and emerging winners. Established innovators are global leaders, formidably placed in their industries and continuing to push the boundaries. They will have a clear road map for growth, enabling them to expand free cash flow and increase their earnings. Emerging winners are smaller, growing businesses that are little known, but exploring ideas that could change our lives. We believe they will have a strong competitive advantage in a new or existing market and are likely to be positioned for rapid revenue growth.

The prospects for these innovative companies are highly attractive and the valuations of many have fallen significantly during the global stock market sell-off. In our view, many of these companies are now looking significantly undervalued. We believe this presents an exceptional long-term opportunity for investors.

Stock stories

Boku

Boku is a mobile payments processor, enabling customers to pay for digital games, music and other goods and services using their mobile phones. This is a rapidly growing global market.

The company has more than 46m monthly active users in 92 countries and last year generated more than 50% of its group revenues in Asia Pacific. This is a market with excellent growth prospects because of its young population and expanding middle classes.

Global tech giants including Amazon, Apple, Facebook/Meta, Google, Microsoft, Netflix, PayPal, Sony and Spotify all use Boku’s systems.

Most of Boku’s business is currently direct carrier billing, where costs for goods and services bought online are added to the purchaser’s mobile phone bill.

However, the company has two other revenue streams, e-wallets and real-time payments, both of which are growing rapidly. E-wallets are where a customer loads up money or connects their bank account to a digital account to pay for goods and services. This service, which is the most popular way to buy online in the Far East, is similar to PayPal, Apple Pay and Google Pay. The other service, real-time payments, is where customers make a direct payment from their bank account to an online company using their mobile phone.

Boku’s management believe these two services have the potential to grow to 40 or 50 times the size of the existing direct carrier billing market.

The company enjoys strong cash generation, with fees charged as a percentage of each transaction, and is highly scalable, with the network capable of supporting more than double the existing number of transactions without requiring major investment.

Boku has highly experienced management and recently signed what is arguably its most important deal to date – a contract to process payments for Amazon Prime Video subscriptions in South East Asia and Africa.

We took an initial position in Boku in September 2020, when the shares had pulled back, partly because of market concerns about an acquisition in identity verification. This division has now been sold, making Boku a pure-play payments processor once more, and we believe the company’s prospects are exciting.

FD Technologies

FD Technologies is comprised of three data-oriented businesses, KX, First Derivative and MRP. All three provide services to enable companies to achieve better results by analysing data more effectively.

KX primarily serves the banking and finance industry. It provides real-time data analytics software used by institutions for a range of purposes, including building trading algorithms and monitoring trading activity for compliance issues. In addition, KX is winning clients in other data-intensive industries including manufacturing, telecommunications, energy and even F1 racing. Research company MarketsandMarkets forecasts that the value of the real-time data analytics market will grow from just over $15bn in 2021 to more than $50bn by 2026, equating to a compound annual growth rate of 26.5%.

First Derivative provides data management and data science consulting services to the capital markets sector and its clients including all the top 20 global investment banks. The company’s expertise enables clients to make the most of the KX platform and other firms’ technology. Spending by investment banks on technology services is increasing rapidly and will reach more than $760bn in 2025, according to research by Gartner. Management at First Derivative estimate that the company’s addressable share of this market could be worth more than $200bn.

MRP’s software platform enables marketing teams to extract insights from customer data that allow them to communicate more successfully with target audiences and analyse results more effectively. MRP was named as one of the leading companies in its field in a recent report by Forrester Research.

FD Technologies works in partnership with leading global players including Microsoft and Amazon and delivers impressive performance for its clients. For example, KX delivers a typical return on investment of 315% over three years, with the initial outlay recouped within less than six months, according to Forrester Research.

Led by a highly experienced management team, we believe FD Technologies can attract lucrative clients in a range of new markets and continue to drive up revenues. This is a quality business in a high-growth sector and in our view it has very strong growth potential.

Source: Canaccord

Guy Feld 12/12/22

Risk Warnings
Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The fund will be exposed to stock markets and market conditions can change rapidly. Prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The fund invests in smaller companies which are typically riskier than larger, more established companies. Difficulty in trading may arise, resulting in a negative impact on your investment. The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of your investment. The Fund invests in the technology sector therefore investments will be vulnerable to sentiment in that sector. The Fund may therefore be more volatile than more diversified Funds. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or in a timely manner. In extreme market conditions redemptions in the underlying funds or the fund itself may be deferred or suspended.

Regulatory Information
This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. It’s provided for general information purposes only and is not personal advice to anyone to invest in any fund or product. Information taken from trade and other sources is believed to be reliable, although we don’t represent this as accurate or complete and it shouldn’t be relied upon as such. Calls will be recorded for training and monitoring purposes.
Issued by Marlborough Investment Management Limited, authorised and regulated by the Financial Conduct Authority (reference number 115231). Registered office: PO BOX 1852 Lichfield, Staffordshire, England, WS13 8XU. Registered in England No. 01947598. Investment Fund Services Limited (IFSL) is the Authorised Fund Manager of the Fund. IFSL is registered in England No. 06110770 and is authorised and regulated by the Financial Conduct Authority. Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Copies of the Prospectus and Key Investor Information Documents are available from www.ifslfunds.com or can be requested as a paper copy by calling 0808 178 9321 or writing to IFSL at the registered office above.