The fund management industry can get too emotional when it comes to certain investments - causing many investors to miss out on opportunities, according to Sanlam fund manager Chris Ford.
Over the past few years, Ford has been part of heated conversations with other analysts and fund managers about Tesla, a company he has held in the £854m Sanlam Artificial Intelligence fund since 2017.
But in his opinion, investing in companies shouldn’t be a “needlessly emotional” discussion.
He said: “With companies like Tesla and Netflix, and many others as well, it's clearly been an incredibly emotional discussion for a large proportion of the investment community who have singularly failed to put their own prejudices at the door.”
In one example of how close-minded the fund industry can get, Ford shared his experiences of a Tesla presentation he saw at a conference in London a few years ago.
“I've never seen a room so filled in London for a company presentation,” he recalled. “It was pretty obvious that a good proportion of the audience had turned up to ‘to watch the circus’.
“There was sniggering in the room as the company representatives said what they said. They weren’t saying anything controversial or new – they were just reiterating the company's position.”
He thinks that this propensity to “just snigger and laugh”, rather than take some companies seriously, calls into question the fund management industry’s understanding of the disruption that is occurring under their own nose.
He said: “That is greatly to the shame of the investment community and greatly to the detriment of their investors.”
Share price of Tesla over 3 years
Source: Google Finance
Although Tesla’s extraordinary success in scaling its manufacturing is now well established, Ford suggested that investors are still missing the potential of many similar companies.
One example is Upstart, a software company using artificial intelligence (AI) to enable automated lending to the consumer market in the United States.
Ford – who holds Upstart in Sanlam Artificial Intelligence – thinks the industry is again missing several things. “It is missing how good their technology is and it is missing how very significantly underserved the market that they're looking to address is,” he explained.
“It is not just missing how underserved it is in absolute terms, it's also missing how poorly served even the other element of the market is – in that getting a loan is a real bore.
“If you can be given the yes or no and have the whole loan origination process automated - as a consumer that’s a far better experience than ever to go through the highly bureaucratic, very human capital-intensive process that people might normally have been subjected to.”
He said the performance of Upstart has been unlike anything he has ever seen before in his career and noted how markets are now expecting it to achieve revenues this year of what they previously expected would not be achieved until 2023.
“We've seen everything brought forward by two years, and it will be brought forward by two years in just the space of six months,” he said. “That's quite extraordinary.”
Upstart share price since IPO
Source: Google Finance
Upstart’s current guidance for revenue in 2021 is roughly $750m, whereas the market is currently expecting $680m.
Ford said that even though the company has dramatically beaten its revenue estimates three times in a row, “the Street still doesn’t believe them”.
He said: “I think it is important to just kind of stand back and recognise here that what we're seeing Upstart do in the consumer lending market is what we've seen time after time over the course of the last 10 years in different industries.”
Amazon has disrupted brick and mortar retail with e-commerce, while Facebook and Google have disrupted traditional media with social media and YouTube. But in their early days not many investors believed they would be able to successfully do so.
Ford said: “We’ve seen lazy, lazy old incumbents time and time again get disrupted by these types of companies.
“Companies that are looking to do great things and are disrupting lazy long-standing oligopolies are exactly the type of companies that investors should be supporting.”
This is why Ford’s fund is focused on finding companies benefitting from artificial intelligence, as it is where he believes the next wave of disruption is going to come from, yet it is still not widely understood by the market.
He said: “Just like at the turn of the 19th and 20th century we found companies like Standard Oil building the energy infrastructure or AT&T building the communications and telephone infrastructure, these companies are building the artificial intelligence infrastructure that we're going to rely on for 100 years.
“As they sit there in that infrastructure layer, they disrupt everything in the layers above them. That creates huge opportunities for innovation to fill the gaps that are created.”
Performance of Sanlam Artificial Intelligence since launch
Source: FE Analytics
Since launch in June 2017, Sanlam Artificial Intelligence has delivered a total return of 182.6%, compared to 28.6% from the IA Specialist sector average. It has also beaten the MSCI All Companies World Index return of 57.7% over the period.
It has an ongoing charges figure (OCF) of 0.82%.