/ SEILERN /
MAKING THE MOST
OF TECHNOLOGY
Seilern’s Raphaël Pitoun says companies with competitive advantages
that create high barriers to entry will be the real winners of the tech boom
T
ECHNOLOGY HAS
NEVER BEEN SO
IMPORTANT. The
impact is obvious and
the rate of change is
accelerating. The time it took for 50
million callers to adopt the use of
the telephone was 74 years; this was
reduced to 13 years for television
and only two years for the internet.
If investors are to capitalise on the
opportunities these trends throw up,
it is vital that they assess what
makes a business successful year
6
after year and deliver consistent
profits in a fast-changing
environment.
For businesses, the spread
of technology has accelerated
thanks to the globalisation of
trade in goods and services.
Clearly it would be difficult to
work with outdated production
tools in an environment of
globalised competition, as was
recently acknowledged by Tom
Enders, the chief executive of
Airbus: “What if somebody in the
industry could cut the production
time or cost by half? Would that
be disruptive? Yes! We need to go
towards that direction, otherwise
somebody else will.”
Even the most established
businesses need to continuously
evolve and embrace new
technologies and those that
do not may find their modus
operandi challenged. Companies
dependent on people, patents
and corporate culture are fragile
by nature.
trustnetdirect.com
For those who consider the
technology sector to be a world
of boom and bust where start-ups
endlessly and frenetically chase
incumbents, it is worth noting
that technology companies
themselves have outperformed
the market as a whole. Over the
last 10 years, the technology part
of the NASDAQ (represented by
the Nasdaq Technology 100) has
outperformed the S&P 500 Total
Return index by a significant 1.6
per cent per annum. Moreover,
the turnover of the index is
actually comparable to the
turnover of other sectors and the
broad index. Hence, it is possible
to find sustainable and longlasting business models in the
technology arena.
The question is, how to identify
the best technology companies
for investment? At Seilern, we
believe you need to look beyond
the traditional skillset of a tech
company and find those with
strong platforms.
A platform is a combination of
different competitive advantages
that makes a company difficult
to compete with and enables it to
maintain high barriers to entry.
Ideal candidates are companies
with long product life-cycles or
sustainable service offerings,
as well as those that leverage
networks.
A long product life-cycle
delivers consistent recurring
revenue and is key when
assessing the predictability of
future sales. The longer a client
sticks with the product, the better
it is.
For example, the life-cycle of
the PLM software of Dassault
Systèmes could last 15 years with
some industries, notably aircraft
and automobile manufacturers.
Dassault’s software is so
integrated into the client
design and production chain
that switching provider would
produce substantial hurdles.
trustnetdirect.com
Identifying the
right platform
is a tedious and
demanding
exercise and
few of the tech
companies
listed in the
world meet this
challenge
Services have the advantage
that they cannot be traded off
as easily as products. But their
proposition must be based on
sector expertise and consulting
rather than pure cost of labour.
For example, the real attraction of
Gemalto, sometimes considered
to be a SIM card manufacturer,
is the management of the secure
element behind the company’s
mobile division.
The network effects can be
very powerful and are mostly
associated with business-toconsumer products such as
social networks or the ecosystem
that Apple aims to create with
its IOS software. But network
effects are also relevant in
business-to-business companies.
Accenture and Cognizant are
among the best examples,
creating sector or industrycentric expertise with one or two
clients and capitalising on them
by attracting further prospects.
It helps to create high barriers to
entry as well as pricing power.
Seventy-five per cent of the
companies in the US healthcare
payer market are clients of
Cognizant.
It is wise to be cautious of
companies that do not control
their distribution channels
for products or services. For
example, a company dependent
on e-commerce may find the
pricing power of Amazon makes
the business more fragile. On the
other hand, a company that uses
the configuration of the market
to its advantage may sometimes
contribute to its strength.
Patents and engineers are
definitely not enough to make a
technology company sustainable.
To us, a specific market
conf iguration, unique services,
the right positioning in the value
chain and a critical size are the
ingredients that make it work.
Identifying the right platform is a
tedious and demanding exercise
and very few of the thousands
of tech companies listed in the
world meet this challenge.
None of the technology
companies we invest in rely on
a specific technological wave.
Actually, most of them, such as
Accenture, Cognizant or Dassault
Systèmes, take advantage of the
chain of technological advances
without relying on a single one.
On the contrary, all of them rely
on a set of skills which transform
them into successful platforms. In
this world of accelerated business
disruption, the opportunity
relies on the creation of new
profitable oligopolies whose
accelerated growth dynamics will
be significantly positive for our
investors.
Most of the companies we
invest in have the balance
sheet, the size and the vision,
meaning they are more likely
to take advantage of the digital
revolution than to suffer from
it. It would increase their
competitive advantage to the
detriment of the weaker players
and reinforce the growth
potential of the leaders over time.
This is another element that
makes us increasingly confident
about the Seilern Stryx funds.
7