Seasoned investors are used to fund managers stressing the ‘all-important’ factors in their decision-making, such as deep value, high growth or high dividends. Consistent long-term outperformance does of course depend on considering several factors because market circumstances change over time.
One of the multiple factors I do like to leverage consistently, however, is science in its broadest sense, incorporating successive discoveries and the new fields that are emerging. Investors should consider how these developments will impact companies, and especially the opportunities and threats they might pose to their commercial operations and the various sectors of the economy.
In the 20th Century, for example, the advent of the motor car made the horse and carriage industry virtually defunct, while there were some extraordinary and game-changing breakthroughs in terms of both destruction (atomic bombs) and medical science in the 1940s.
The consequences of atomic research
The groundwork that led to the atomic bomb - splitting the atom - was originally conducted by two scientists, John Cockroft and Ernest Walton, who were trying to prove Einstein’s equation, E equals mc-squared, in Ernest Rutherford’s Cavendish Laboratory in Cambridge University. With Rutherford’s critical input in 1932, the three men announced to the world the first artificial disintegration of an atomic nucleus and the first nuclear transmutation of an element ((lithium) into another (helium).
This gave rise to two very different fields: thermonuclear or atomic bombs and nuclear energy. One represented a deeply destructive path, as witnessed at Hiroshima and Nagasaki, and the other is now an important contributor to solving the world’s energy needs.
Launch of the pharmaceutical industry
On the medical side, Alexander Fleming discovered penicillin in 1928 but it was not until 1941, when the Second World War was raging, that Professor Florey used it for the first time on humans after testing it on animals in the Dunn School of Pathology, Oxford University. Penicillin has probably saved more lives over the last 70 years than any other medical treatment, and millions of courses of antibiotics are now taken all over the world to prevent and treat diseases. It also provided the foundation for the modern pharmaceutical industry. Other antibiotics were subsequently discovered to create cures for more diseases, such as cephalosporins, followed by the discovery of monoclonal antibodies and treatments for cancer.
A more recent example of the importance of medical science can also be found in Oxford at Jenner Laboratories, one of the world’s top vaccine research centres and home to Vaccitech. Now floated on NASDAQ, this company created the Oxford/Astra Zeneca vaccine, which has been distributed worldwide to save millions of lives from Covid-19.
David Norwood (a chess grandmaster) set up and led in 2015 the spinout company Oxford Sciences Innovations (now Oxford Sciences Enterprises). In 2016, he had the foresight to help ensure the successful spinout of Vaccitech, a company co-founded by Professor Adrian Hill, the Director of the Jenner Institute at Oxford University and a Wellcome Trust senior investigator; and Dame Sarah Gilbert, the Professor of Vaccinology at the university. The company was working on cures for global pandemics such as Ebola, SARS and MERS. This was difficult at the time because such viruses were regarded as distant problems: no one living had had any experience of a global pandemic.
Norwood’s conviction that it was vital to prepare for a possible pandemic four years before Covid-19 arrived in the UK meant that Vaccitech was spun out at a time when very few investors were interested in treatments for a global pandemic. A few investors did listen to his urgent call and committed investments, including the Liontrust Balanced and Global Alpha funds, we are delighted to say. At the spinout, Oxford Sciences Innovations owned 55% of Vaccitech, which was a much higher percentage than usual.
Vaccitech is now working on other critical diseases such as Human Papillomavirus, which causes nearly all cases of cervical cancer, and Chronic Hepatitis B, which affects an estimated 257 million people worldwide.
The FAANGs’ debt to Professor Berners Lee
Oxford University is also the source of the phenomenal World Wide Web. Sir Tim Berners Lee, a professorial fellow at the Department of Computer Science, created the Web, the first web browser and the web server. The internet became “the fastest growing communications medium of all time and changed the shape of modern life forever”. He gave his ideas freely to others with no patent application. He made no money from his inventions but most of the world’s largest companies today – Facebook, Apple, Amazon, Netflix, Google – the ‘FAANGs’ – and Microsoft would likely not exist without them.
Future developments
Looking to the future, a significant development that we can see coming through is the Metaverse launched by Facebook, which has also now rebranded itself as Meta Platforms. The Metaverse is a virtual reality world on a massive scale, an inter-operable network of real time-rendered 3D virtual worlds. An unlimited number of users can experience it simultaneously with individual senses of presence and with continuity of data, such as identity, history, entitlements and objects.
Users can interact, game and experience things as they would in the real world, with 3D headsets making the experience authentic. They can engage in decentralised virtual economies: buying, selling and trading digital assets such as avatars, virtual clothing, houses and shops.
For investors, the challenge is to determine whether the Metaverse will succeed: will we spend more time and money online as virtual people, owning virtual homes and property? Or will it fade away and be replaced by the ‘next big thing’?
As investors, we can participate in this theme now by taking the ‘picks and shovels’ approach used in the Gold Rush. For example, Nvidia provides graphic processing units or graphics cards. For many of those seeking to participate in the Metaverse, these will provide the backbone of their graphics processing. Nvidia has been a core holding for some time in the Liontrust Global Alpha, the Liontrust Balanced and the Liontrust Global Technology funds.
The energy challenge
Investors should also consider the energy industry, in which scientists are poised to make significant breakthroughs, taking the world far beyond nuclear energy, fossil fuels and even solar panels. If we could capture just one day’s sunshine then this could meet the world’s energy needs for a year.
Photovoltaics, or the conversion of sunlight into electricity, is another field in which an Oxford-based company, Oxford PV, leads the world. It is using Perovskite, or silicon solar cell, technology. This new science has already yielded impressive results with a solar conversion efficiency of a world record 29.52%. It may one day be possible to paint a thin layer of transparent Perovskite gloss on our windows at home and cover all our domestic energy needs from this.
Photovoltaics will also likely have a major detrimental impact on oil and gas companies globally. Thinking globally is crucial for investors because significant steps forward can happen anywhere, not just in the US and Europe.
Five key drivers of performance
The science theme is one of five key drivers applied in the same investment process used by the Liontrust Global Smaller Companies Fund, the Liontrust Global Alpha Fund and the Liontrust Balanced Fund. The other key drivers include Intellectual Property, Deep Technology, Positive Change and Entrepreneurial Vision.
The Global Smaller Companies Fund invests in companies with a market capitalisation of between US $2 billion and US $10 billion. It was launched to capitalise on the work conducted over the previous 15 years to identify small caps before they became mid-caps. The companies that grow beyond the $10 billion mark then become eligible for the Global Alpha Fund.
The Global Alpha Fund, which is powered by global mid-cap stocks with some appropriate large and mega caps to balance it, includes 19 stocks that have left the Global Smaller Companies Fund over the last five years.
As mentioned, science is just one of the key drivers used in our investment process. In future articles, I will address the other four.
Key Risks
