Information technology is one of the fastest and most sought-after investments on the market. Portfolio Manager at Australian Ethical, Mason Willoughby-Thomas, explains how we sort the signal from the noise.
Information Technology (IT) has been a successful hunting ground for Australian Ethical for many years. In today’s society, the IT sector is one of the fastest moving and most dynamic segments of not only our investment universe, but the overall economy.
Our investments cover a broad range of areas such as IT outsourcing providers, IT consultants, hardware vendors, data centre operators, software developers and telecommunications companies. Many of the companies we invest in offer products, services or solutions that provide their customers with meaningful improvements in operating efficiency, productivity and waste reduction. We look for companies that provide new ways for their customers to access improved products and services at a competitive cost. The constantly growing IT sector is an attractive investment opportunity that fits well within the principles of our Charter – for example, through improving efficiencies and contributing to human education.
Keeping up with constant flux
It’s no secret that technological obsolescence and disruptive forces pose a constant threat to most IT companies. These unruly forces can be highly destructive to conventional operating models and can rapidly degrade a company’s competitive position. A prime example has been ‘cloud’ computing. Facilitated by the rapid evolution of high-speed data networks, cloud computing has become a real player against traditional computing networks. This has fostered a progressive shift away from capital intensive on-site IT infrastructure models with high upfront costs. It’s now all about ‘consumption’ based IT models that only charge the customer for what they actually use, managed using outsourced infrastructure and remotely hosted software. This development has had a highly disruptive effect on traditional IT services providers that tend to just focus on servicing customers’ in-house IT. These international IT service providers benefit from a new layer of competitiveness as greater global interconnectivity is supported by increasingly ubiquitous high-speed data networks. In essence, there’s been a very rapid commoditisation of traditional IT services – and we aim to position our IT investments where we can gain from a positive change for society.
While a number of companies have suffered what we in the business call ‘value erosion’ as new entrants and new technologies have displaced old business models, there’s also a big opportunity for the astute investor. Companies such as Perth-based ASG, who we’ve invested in, have taken advantage of the sudden shift towards cloud-based IT models and have quickly reinvented themselves as providers of ‘new world’ services. ASG has a strong base of multi-year contracted customers, which has given them stable earnings and cash flow to support the heavy investment needed to transform their business. We recognise that a key differentiator between the stronger and weaker performers in the IT sector is having contracted, recurring revenue streams – so this is another important key investment characteristic we target. We’ve also invested in IT services companies such as UXC and Oakton who are market-leaders in new technologies and service capabilities.
Disruption with purpose
The IT-disruption story is certainly influenced most by companies that benefit from change, or are themselves the source of the disruption. These kinds of companies often exhibit unique capabilities or technologies that are difficult to replicate, are market leaders in their particular field, operate globally, face limited competition, or provide products or services that are ‘mission critical’ for their clients. A prime example is construction collaboration software provider Aconex. Aconex provides a centralised platform for many of the world’s largest construction contractors and asset owners to collaborate. The technology solution is a clear market leader, the addressable market exceeds US$6bn with only modest saturation to date, the software is considered mission-critical, and the competition is modest at best.
Language services company Appen is another highly successful investment for Australian Ethical. It’s a company that is benefiting from the rise of the online world and its disruptive influence. Appen is an Australian-owned and based company that provides access to a global army of linguistics specialists that help ‘tune’ computer algorithms that sit behind prominent internet search engines, social media platforms, and eCommerce websites. Appen also provides specialist language services for speech recognition – work that is ever expanding with the popularity of software like Apple’s Siri and Microsoft’s Cortana.