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Neptune’s tech fund manager sees growth galore in a new digital economy
Thursday 27 Oct 2016 Author: Steven Frazer

We live in a paradoxical world. Global growth has stalled and there has been less productivity growth over the past 10 years, according to analysis by researchers at investment bank Morgan Stanley, yet it feels like there is more technology innovation around us than ever before. ‘We see scope for digitalization to re-accelerate productivity growth,’ the banks’ analysts say.

If steam was the engine of the first industrial revolution, electrical power the second, it is Moore’s Law that has largely driven the third – the digital revolution that is happening all around us right now.

‘Our analysis suggests that the US economy is only 27% digitalised and that there are lots inefficiencies to be unlocked, which could increase the level of digitalisation to 43% in the next five to 10 years,’ they add.

The speed at which this transformation occurs will depend on the level of investment in technological advances such as the Internet of Things (IoT), big data, and business process optimisation driven by the analytics of that data. Opportunities for investment in the digitalisation of business are not lost on Ali Unwin, who runs the Neptune Global Tech Fund (GB00BYXZ5N79).

For him, the digital enterprise is not just about spending more on IT or giving iPads to workers. He believes the soul of the issue is captured best by market researcher Gartner report earlier in 2016, referencing the theme as ‘the creation of new business models and processes by integrating technology with the physical world.’

funds table 1

Profit from the digital revolution

But what does that really mean? ‘This can range in scale from companies that dominate a space without owning assets themselves (Facebook, Uber, AirBnB) to small businesses starting to market themselves online,’ he says.

‘We find from our discussions with company management teams that customers are becoming more aggressive in driving their digital transformations,’ he says. ‘This highlights the impact that this trend will have on a company’s long-term success and, as so often in technology, we believe this change and disruption presents opportunities for investors.’

How do investors tap into the profit potential of this burgeoning space? Target the right companies, clearly, or the right fund, to cover multiple bases, the real beauty of collective investing.

Unwin has recently been singing the praises of a handful of companies, UK and foreign, large and small, that he believes are in the right place at the right time to capture a share from the digitisation of the enterprise.

Arguably the best-known of this handful is Adobe Systems (ADBE:NDQ), largely because most of us use its Adobe Acrobat software to open PDF files. Some of us may also know the graphic design tool Photoshop, extensively used in publishing and responsible for millions of creative camera shots of family, friends and a multitude of celebrities.

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Companies large and small

‘Adobe has been the dominant force in creative digital software for 15 years, and we believe they should benefit as digital content becomes more important and companies invest more in digital marketing and branding efforts,’ explains Unwin. Interestingly, the company is also completing a transition from a licence to a rental model for its software, a transition that can typically pinch profits early on but provide greater earnings quality in the future.

Salesforce (CRM:NYSE) is another technology industry goliath liked by the Neptune fund manager, worth around $50bn. A pioneer of the software-as-a-service (SaaS) model, where its customer relationship management (CRM) applications are hosted in the cloud and not on a customer’s own IT equipment. The company has signed several significant deals in the past few quarters, which suggests that the very largest organisations see the company as a key partner in their digital transformation efforts.

It’s a similar story with $2.5bn market value Pegasystems (PEGA:NDQ). Its tools allow organisations, including Coca-Cola (KO:NYSE), Vodafone (VOD) and HMRC, to enhance their digital capabilities and change with their customers as they enter the digital world. ‘Customer experience will remain extremely important in the digital world, and we believe Pegasystems is likely to benefit as organisations invest more heavily in it,’ spells out Unwin.

Small companies, big potential

While the Neptune Global Technology Fund’s remit, to hunt down the best in class companies, will inevitably see its investments gravitate to the world’s technology giants, Unwin refuses to ignore the smaller growth environment here in the UK. Not currently holding a stake in the business, Unwin is nonetheless a fan of DotDigital (DOTD:AIM), software supplier to the digital marketing industry. Its tools allow marketing professionals to build dynamic campaigns and target them at specific audiences.

‘Marketing automation is a major growth area and recent research from Gartner shows that companies expect that chief marketing officers will spend more on IT than chief information officers by 2017.’

That would be a fascinating transition if control over company purse strings plays out as Gartner predicts, and if it does, Unwin firmly expects global PR, communications and marketing business Next Fifteen (NFC:AIM) to prosper. ‘We believe companies are likely to require external support as they adapt to the digital world, and Next Fifteen could use is digital heritage as a competitive advantage to win a share of this work,’ says the Neptune fund manager.

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Ali Unwin, Neptune Global Tech Fund

Alastair Unwin

Neptune Global Tech Fund

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