Invest with Purpose

The digital revolution have investors missed the boat?

Reshaping how we live

Digital transformation is reshaping all aspects of our lives, including the way we work, consume, and entertain ourselves. There have also been major shifts in the way companies operate, and every sector has had to adapt. In the retail industry, businesses must now consider not only the physical shelf, but also the digital shelf, as the shopping experience continues to digitise. In addition, there have been major changes in terms of how consumer brands market to their audience – they can no longer rely solely on television advertisements and billboards, but must now consider how they target customers through their mobile phones and social media.

As the digital transformation continues to permeate every aspect of our lives, there are technological developments that our investigative research team view as particularly interesting – including light detection and ranging (Lidar) and radio detection and ranging (Radar). To put it simply, this is the use of lasers and radio waves to detect other objects. Lidar and Radar are frequently used in cars and autonomous vehicles, and are now becoming increasingly smaller and more effective, meaning that numerous sensors can be used.

Has the tech ship sailed?

In recent years we have seen technology sector stocks that are dialled into the technology innovation theme perform very well, which raises the question: have investors missed the boat? The short answer, we believe, is no; we still see opportunities in the technology area. We are still relatively early in the digital transformation movement; in fact, many industries, such as education, energy, transportation and health care, are still in the earliest phases of deploying technology.

If we focus in on the UK market, although technology stocks account for only around 2% of the benchmark (FTSE All Share index) by value, the impact that digital transformation has on every sector means that investors do not have to miss out on the theme in this specific market. Despite not necessarily being household names, there are a number of small and mid-cap stocks that are leaders in their niche and have a significant runway for growth.

Risky business?

Although the digital transformation has the potential to significantly affect and improve our lives, we must acknowledge its potential drawbacks. As adoption of technology grows, we become increasingly connected to each other and to our surroundings. Our digital footprints will become much larger than they are today, which unfortunately presents increased scope for cyber attacks. Nevertheless, this also creates investment opportunities, for instance in the form of cyber-security vendors, which are able to protect users.

As technological innovation has progressed, so too have data privacy rules that seek to regulate who controls our data, such as the General Data Protection Regulation (GDPR) in Europe. These rules have changed the way that data is controlled: anyone who takes our data is now a custodian of it. This presents a number of risks to firms given the extent of the regulation, and there can be serious consequences if firms misuse this information. On the other hand, this has given rise to new companies that help businesses to ensure they are using data appropriately.

Technology and sustainability go hand in hand

Finally, we must recognise the implications that digitalisation has on sustainability. The consideration of environmental, social and governance (ESG) factors can be a useful tool to achieve a more holistic picture of companies. There are various ESG issues that are prevalent in the technology sector, in particular around social media, cyber security, and (as mentioned) data privacy. In addition, many of the large technology companies have voting structures that can be detrimental to shareholders. All of these risks must be monitored.

We look for businesses that will survive and thrive for not just the next few years, but for the next few decades, and the focus on sustainability has led to new business opportunities. A good example of this is a global leader in industrial software. The company essentially creates a digital representation of a physical asset for industrial businesses. This virtual model is able to study the asset and suggest potential improvements, thereby improving the efficiency of industrial processes. Not only does this have financial advantages, but also significant environmental benefits, including reduced waste and lower carbon emissions.

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