Investment Letter September 2017

Over the past 10 years – in the liberal parts of the world at least – political and financial economies have forked apart. The large scale corporate world has become stronger as government authority has paled. Doubtless, on the government side of the ledger, this is partly due to an erosion of faith in governments following their interventions to save banks and shore up the indebted after the Global Financial Crisis.
Large companies which are not banks have been able to take a free ride on a progressively cheaper cost of capital and load up on cost-saving technologies. With freely available capital and cheap debt, companies have variously invested, bought out competitors, lifted their dividends and bought back their own shares. In the US, buy-backs have become a mania. Strong companies have become stronger and companies of all types have become greatly better at marshalling technologies.

Technology, often spoken of as a disrupter and a general threat, has in fact facilitated a multitude of improvements in the way in which business is conducted: benefits that accrue to the adopting company if not always their customers who rightly sense they are being kept at bay. For example, by computer driven enquiry systems. Sadly, modern life comes with it some deeply unsatisfying experiences with large companies.

The latest wave of technology adoption entails robots and smarter computers displacing human employment, with a myriad of consequences. The adequately pensioned will be able to work on their golf swings, whereas the rest of us that are not surgeons or physiotherapists will press anxiously into the customer service jobs that remain. “I’m sorry, there appears to be a problem with the algorithm, would you like another cappuccino?”

Some advanced economies are taking these developments quite seriously. South Korea has, for instance, instituted a tax on robots. This will not slow down the adoption of robots, nor is intended to, but it does divert money to address some of the consequences.

Whilst we do invest, on behalf of clients, in companies that are plainly labelled Tech and recognised as such, the bigger trend outside the few giants that have reshaped our behaviours such as Amazon and Google, is in the application of technologies in more mundane activities.

Take Assa Abloy for example. Assa Abloy was formed in 1994 via the merger of ASSA in Sweden and Abloy in Finland. The progenitor company of the two, Abloy, was founded in 1918 to commercialise Emil Henriksson’s 1908 invention of the disc tumbler lock. The breakthrough here was that this new type of lock did not require springs to operate and was therefore reliable in harsh climates such as Finnish winters. It also facilitated the use of keys for the common areas of properties. Although more expensive than the locks they displaced, the disc tumbler system is a lot more difficult to pick.

99 years later, the company Mr Henriksson founded is still a lock company with a 15% global market share: more than the market shares of the 2nd, 3rd and 4th players combined. It still uses “locks” in company materials but more favours the term “door opening solutions”, which presumably sounds snappier in Swedish and Finnish. Assa Abloy is leading the way with smart card access systems, the like of which we have been familiar within hotels for some years now and permit, in commercial premises, centralised control and card holder monitoring. In such buildings, smart access systems are embedded in doors at the manufacturing stage and delivered to construction sites, ready to go.

Technological edge exists in mundane places. In another example, PPG Industries (founded in 1883 in Pittsburgh) was for decades known as a paint company and now develops and sells smart coatings. These have a critical application for instance in driverless vehicles as they rely on a technology called Lidar (light detection and ranging) via which driverless vehicles recognise other vehicles and street furniture. This is a new age motoring technology available at 17 times next year’s earnings – a better price than Tesla at a multiple of infinity (Tesla currently has no earnings).

Technology is like the air, it exists most everywhere.

Assa Abloy and PPG Industries are component investments in the Cerno Global Leaders Fund which will commence trading on 1st November. Please click here for more information.

James Spence
Managing Partner

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By |2017-09-15T14:57:13+00:00September 15th, 2017|Investment Letters|

About the Author:

James is a co-founder of Cerno Capital and lead manages a number of the firm’s collective and private portfolios. After qualifying as a chartered accountant in London (Coopers & Lybrand, 1989) he relocated to Asia. Between 1991 and 2004 he worked as an equity analyst, head of research, and latterly as an equity strategist at WI Carr, Paribas, HSBC and UBS, based variously in Hong Kong, Singapore and Jakarta. James graduated from the University of St Andrews, Scotland with an MA in Philosophy & Logic in 1986. James is a Member of the Chartered Institute for Securities & Investment.