After one of the most tumultuous starts to the year since the 1970s, we are starting to see opportunities appear across our watch list of innovative companies.
Our philosophy is simple – we believe innovative companies can achieve superior returns. Why? Because innovative companies can achieve faster growth, build stronger barriers to entry and are more resilient and adaptable.
The Global Innovation investment process identifies companies that are creating genuine value for customers by driving down prices – like Amazon has done – or greatly improving the quality of a product or service. We see innovation as the ultimate marker of quality in a business and the best driver of growth. But not every innovation is a great investment so companies must also have strong barriers and management teams that can execute.
As markets have sold off indiscriminately, value has emerged for us across two types of companies. First, high quality, defensive companies with exceptional barriers to competition, such as Universal Music Group (UMG), which is down around 30% this year, opening up a rare window to buy. Second, high growth companies such as Twilio − down as much as 70% year-to-date − are representing attractive long-term investment opportunities.
UMG, home to many of the top recording artists globally, from Taylor Swift to Ariana Grande and The Beatles, has innovated over the past 25 years of turbulent change in the music industry as it shifted from CDs to streaming. UMG provides unparalleled value for its artists, deploying its unrivalled network and resources to support them through each stage of their development.
As the largest recorded music company in the world (with around a 31% market share), UMG’s scale provides significant fixed cost leverage and bargaining power over distribution platforms. Combined with industry-leading IP ownership of content (over 3 million recordings which can be monetized across multiple revenue fronts and for many years), this creates a flywheel of value creation, as evidenced by around a 20% return on capital. At the same time, its bargaining power with artists is assured by no individual artist making up more than 1% of its revenues in any given year. This means the company is well-positioned to benefit from the strong growth in the music industry driven by companies from Spotify and Apple to Tencent Music.
Twilio (a technology company that makes communication software) has been hard at work since its founding in 2008, solving the toughest challenges of business to consumer communication via SMS, video, email and so on.
Twilio boasts over 268,000 active accounts and is helping companies as diverse as Lyft (to communicate directly with drivers and riders) and the American Red Cross (to communicate directly with volunteers to solve critical problems). In fact, Twilio is now so deeply integrated into the digital economy that it has over 9 million developers on its platform – far more than its closest competitor Vonage with 1.2 million.
When do we interact with Twilio in our daily lives? All the time: when you order your dinner from Deliveroo, receive an SMS from PayPal and American Express requesting a confirmation of identity, or when you buy groceries on Amazon Fresh. The company is reducing communication costs for its clients by 90%, which is a huge saving and will be very important for businesses trying to navigate the current high-inflation environment.
Twilio is a great example of a company that has invested heavily for growth over the past decade, building robust barriers in the process and is now pivoting its focus towards profitability. We believe it can become a hugely profitable company, generating lots of cash for investors.
While we expect markets to remain volatile in the short term as central banks move to keep long-term inflation expectations anchored, value is emerging across our watch list and we are putting capital to work in these two types of companies.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Investment in funds managed by the Global Innovation (GI) team may involve foreign currencies and may be subject to fluctuations due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility.
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This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
