There is no shortage of fund managers commenting on how the coronavirus pandemic has accelerated the digitalisation of the economy. However, finding companies beyond the well-known big tech names can sometimes be a struggle.
As such, Matthew Tillett, manager of the £422m Brunner Investment Trust, explained how looking within different levels of the economy has helped him find companies benefiting from the megatrend of digitalisation.
He said: “This is something that has impacted all aspects of life, society and the economy, and increasingly it starts to impact more and more sectors over time.
“One of the reasons why it affects so many different areas is because it’s happening at different levels.”
The first level, he explained, is the infrastructure level where companies’ business models are to provide building blocks for the digital economy to function.
He said: “I would include the FAANGs [Facebook, Amazon, Apple, Netflix and Google-parent Alphabet] in there, they are the platforms, cloud and infrastructure, but that’s not the only area.
“You also see it in the financial sector where you have companies like payments businesses like Mastercard and Paypal which are to some extent are providing the infrastructure for the whole payment system to function within the economy.”
Despite not being popular FAANGs stocks, or even part of the tech sector, they are still benefiting from some of the same trends.
Financial exchanges were another example Tillett highlighted. He took advantage of the coronavirus March dip to buy shares in CME Group.
He said that as the world’s largest financial derivatives exchange, CME Group is in a monopolistic position and provides the crucial infrastructure architecture that facilitates digital transactions in certain areas of the financial markets.
Share price of CME Group year-to-date
Source: Google Finance
The second level Tillett pointed to is the business-to-business layer. These are business models who are using the infrastructure to sell businesses and products to other businesses.
Tillett said: “Software is an obvious example but it’s not the only example. We’ve had a big position in Accenture for quite a long time, and that’s a professional services business that is doing really well because it is facilitating the digital transformation of its clients.
“If you go down into the third layer, the business-to-consumer layer, companies that are selling products and services to the consumer, again using that infrastructure, you see a wide range of examples.
“The obvious one is e-commerce like Amazon and ASOS, we won’t deny they are doing well because of this trend but it’s not the only example.”
Tillet highlighted the financial sector as another example: “That’s an area where you are seeing the consumer finance, savings and investing, very much move into the digital realm.
“That benefits platforms that have scale and can amalgamate more and more assets in one place then the benefits can accrue to the customers in the form of lower costs to serve and better spreads on trading.”
This is one of the reasons why he owns Charles Schwab Corporation in the US and the UK’s IG Group in the Brunner Trust portfolio.
This trend can also be seen in the branded consumer space. Tillett explained: “If you look at what has happened during the pandemic, some of the big brands the likes of Adidas have obviously been hit quite hard as a result of the lockdowns, but their online business has absolutely blown the lights out.
“Adidas has been growing at 80 or 90 per cent online in most markets around the world, and so this is benefiting those companies that had invested quite heavily behind the digital side of their businesses.”
He added: “We are trying to be on the right side of these structural trends, understand how they are impacting different industries, different business models and make sure we are invested in companies that benefit from it.
“But at the same time making sure we get an attractive valuation and not just automatically chasing things that everyone else is owning.
“I’m not saying Amazon or Facebook are bad investments, I just think those are quite well-known investment cases and very widely-owned, and on some measures they are quite pricey already, so we try to look a bit more broadly and think a little bit more laterally.”
Tillett finds companies such as CME Group, Accenture and Adidas more attractive than the FAANGs, primarily because he feels he is getting an attractive valuation for good quality businesses that he expects to grow over the long term.
He finished: “That doesn’t mean that Amazon, Facebook and Alphabet aren’t going to grow as well, but it is clear that if you look at the valuation, they need to grow quite a lot in order to justify the valuations that they are already sporting.”
Over the last five years, the trust has delivered a 64.42 per cent total return compared to 88.29 per cent for the average peer in the IT Global sector.
Performance of the trust over 10 yrs
Source: FE Analytics
Brunner Trust has ongoing charges of 0.67 per cent and is 7 per cent geared according to the Association of Investment Companies. As of 21 October 2020, the trust is trading at a 14 per cent discount to net asset value (NAV) and has a yield of 2.5 per cent.