Innovation Investing
In Short
INTRODUCTION
With AI and digitalisation set to revolutionise every sector, companies that can unlock, integrate or enable the growth potential of rapidly advancing new technologies should find themselves the winners of tomorrow, explain two innovation specialist portfolio managers from the Generali Investments ecosystem: Aperture Investors and Sycomore AM.
Anis Lalhou,
CIO Equity, UK and Portfolio Manager
Europe: The overlooked innovation powerhouse
"We seek European companies that are embracing and integrating innovation into their DNA – whatever the sector"
1. How does Aperture European Innovation (“AEI”) invest in innovation as a growth enabler?
AEI's investment strategy revolves around understanding the S-curve, a fundamental concept in innovation. The S-curve represents the typical adoption pattern of innovations over time, from the slow early beginnings as the technology or process is developed, to an acceleration phase as it matures and begins to be adopted (the steepening of the curve) and, finally, to its stabilisation over time, as adoption becomes widespread (the flattening of the curve). While each innovation has unique drivers, the S-curve reveals a common trajectory.
Our approach is to leverage the S-curve in seeking to identify sustainable growth. Take generative AI, for example, which is a groundbreaking innovation expected to define the next decade or more – regardless of whether interest rates and inflation go up, down, or sideways. Generative AI is a prime example of a potentially exponential adoption curve that we seek to exploit in our strategy. To invest in these kinds of remarkable growth enablers, we analyse each innovation within its own vertical and try to understand where it currently sits on the adoption curve, while applying behavioural finance teachings in our efforts to unveil market biases around the share price, projected forward earnings, and other company fundamentals. This meticulous bottom-up analysis helps us determine whether potential investments align with our growth-centric perspective.
2. How does the Aperture European Innovation strategy use flexibility and sector-diversification to target growth opportunities?
AEI’s raison d'être lies in recognizing that innovation transcends and permeates every sector. It's everywhere, from healthcare's digitalized drug discovery (like mRNA technology) to the elephant in the room, generative AI, which is the most versatile technology I think we’ve seen since electricity. And remember, while electricity revolutionized industries, it wasn't just confined to "the power sector." Similarly, generative AI will seep into everything – finance, medicine, real estate… the list continues.
When we launched AEI, the investing world was laser-focused on US tech, neglecting Europe's potential – a manufacturing powerhouse that is teeming with innovation. Every industry here bursts with opportunity. Just look at healthcare, where digital tools are accelerating drug discovery, and that's just the tip of the iceberg.
Now, with generative AI in its early stages, the spotlight is on "enablers." These are the companies building the infrastructure for this revolution, and Europe is often overlooked. The world is buzzing about ChatGPT and Nvidia, but they need a whole ecosystem to thrive. Nvidia’s supercomputers need supercomputers to make them, and many of those are made by European industrial giants. AI is not a solo show. I’d point to an excellent recent article in The Economist explaining how Europe is at the very epicenter of AI enablement (“Does Europe at last have an answer to Silicon Valley?”)
In short, innovation is not just about "tech companies" in Europe; it's about traditional industries embracing innovation and integrating it into their DNA. They're not just finding applications for AI; they're embedding it, becoming smarter, and more efficient.
So, every sector, every vertical – that's where the growth opportunities lie. It's not about finding a niche for AI; it's about weaving it into the fabric of your business. That’s why AEI emphasizes sector diversification and extends beyond the US and tech.
3. What are the key opportunities and risks for European innovation in 2024?
In 2024, our focal point is the transformative potential of generative AI due to its qualities as a general-purpose technology across various industries. Meanwhile, research into ageing and longevity that leverages AI is expected to advance. Defined EVs, tackling range anxiety and affordability, are also poised to make major advancements. Additionally, graphics processing unit (“GPU") manufacturers, cloud service providers, and R&D leaders in natural language processing and machine learning are primed to benefit from the AI boom. While Europe holds hidden AI gems across all sectors, there is potential for both winners and losers given the technology's rapid evolution. Regulatory and societal impacts like job displacement and privacy concerns warrant careful consideration, but AI's long-term potential remains in our view a compelling investment prospect.
David Rainville,
Portfolio Manager, Global Technology
Combing the globe for sustainable technology enablers
"Our deep proprietary ESG analysis allows us to find responsible companies worldwide that are unlocking the digital revolution"
1. How does Sycomore Sustainable Tech (“SST”) invest in innovation as a growth enabler?
Over the next decade, digital products and services will claim a growing share of global GDP, transitioning from 15% to 30%. This implies that the technology sector should significantly outperform global economic growth. That’s why the Sycomore Sustainable Tech strategy invests in the underlying infrastructure and the enabling technologies that are driving this digital revolution – the core engines propelling the digitalisation megatrend. Our investment universe is global, and as an Article 9 strategy under SFDR, we seek responsible companies that we believe can generate sustainable returns over the long-term for our investors.
Our strategy focuses on two key areas. Firstly, the majority of our investments are allocated to digital infrastructure, encompassing public cloud vendors, infrastructure software, data and analytics companies as well as the underlying “deep tech” value chain like servers, chips and networking equipment. We also invest in technologies that help secure this new world infrastructure, through cybersecurity companies. We invest in both established leaders and disruptive new entrants in this space. Secondly, we invest in the applications that sit atop that infrastructure, which people use in their day-to-day, whether for work, or in their personal lives. We specifically seek companies in the application space unlocking this potential through advanced data analytics, AI-powered insights, and workflow improvement solutions. We believe the ability to derive actionable and intelligent insights (application layer) from data (infrastructure layer) will be a key differentiator for businesses across all industries.
Unlike many strategies drawn to consumer-facing technology, we mostly prioritise enterprise-oriented solutions empowering businesses to adapt and thrive in the digital age. We prefer this customer base (vs. consumer markets) because they are sophisticated and committed technology buyers that have very large wallets with very low churn. These companies buy technologies that enhance their operational efficiency, optimize their workflows, and facilitate the development of next-generation digital products and services which allows them to be relevant in an increasingly digital future.
2. How does SST’s focused ESG approach help to target growth opportunities?
The Sycomore Sustainable Tech team takes a distinctive approach to tech investing, prioritizing long-term financial fundamental strength as well as strong sustainability profiles. We go beyond traditional financial analysis by conducting a holistic 360 review of the business across all stakeholders which is underpinned by our proprietary SPICE research methodology. Our process considers the perspectives of society & suppliers, people (employees), investors (business model and governance), customers, and the environment. This comprehensive approach helps us identify companies with lower risk, leading to investments that, in our view, create sustainable value that is shared over the long term. In addition, our model assesses how companies integrate sustainability issues into their operations and the positioning of their products and services in meeting societal and environmental challenges.
At the heart of our philosophy lies the Charter of Responsible Tech, co-authored with Revaia. This framework focuses on three key pillars:
Tech for Good: We invest in companies whose products and services have a positive societal or environmental impact. This is not just about "feel-good" initiatives; we assess potential impact through quantitative methods, research and company discussions.
Good in Tech: We assess whether and to what extent the practices of a company are designed to be responsible and to limit negative externalities of technology on individuals and the environment. Does the company design and use technology ethically and responsibly? Companies with stringent data privacy guidelines exemplify this pillar, while companies like Facebook/Meta, with its Cambridge Analytica scandal, falls short.
Improvement Enablers: We prioritize companies actively improving the first two pillars. This allows us to engage with businesses on their journey to adopt best sustainability practices.
For a company to make it into our portfolio, it must meet at least two of these three criteria. The aim is to identify companies with positive long-term sustainability benefits and mitigated negative risks across all stakeholder groups, generating both financial returns and positive changes.
3. What are the key opportunities and risks for Sustainable Tech in 2024?
We view cybersecurity, particularly through AI, as the biggest risk, as cyberattacks are escalating aided by the better emulation of human behaviour by large-language models. Investing in cybersecurity, therefore, becomes a positive growth enabler for us. Another risk, in our view, is with companies building generative AI products and the non-ethical AI risks they carry. We expect more regulatory scrutiny on the horizon as we see a lack of clear guidelines currently, so thorough analysis is essential. Looking ahead, we favour opportunities in the semiconductor and software sectors due to higher quality and superior margins. We more cautious on certain hardware companies that carry lower margins and have much higher instances of human rights and labour rights violations in the supply chains.
IMPORTANT INFORMATION
This marketing communication is related to Aperture Investors SICAV and Sycomore Asset Management, open-ended investments companies with variable capital (SICAV) under Luxembourg law of 17 December 2010, qualifying as an undertaking for collective investment in transferable securities (UCITS) and their Sub-Funds, European Innovation Fund and Sycomore Sustainable Tech, altogether referred to as “the Funds”. This marketing communication is intended only for professional investors in the countries where the Funds are registered for distribution and is not intended for retail investors, nor U.S. Persons as defined under Regulation S of the United States Securities Act of 1933, as amended.
This document is issued by Generali Asset Management S.p.A. Società di gestione del risparmio.
Generali Investments Luxembourg S.A. is authorized as a UCITS Management Company and Alternative Investment Fund Manager (AIFM) in Luxembourg for European Innovation Fund, regulated by the Commission de Surveillance du Secteur Financier (CSSF) - CSSF code: S00000988, LEI: 222100FSOH054LBKJL62.
Generali Asset Management S.p.A. Società di gestione del risparmio is authorized as Italian asset management company, regulated by Bank of Italy and appointed to act as marketing promoter of the Fund in the EU/EEA countries where the Fund is registered for distribution - (Via Niccolò Machiavelli 4, Trieste, 34132, Italia - C.M. n°: 15376 - LEI: 549300LKCLUOHU2BK025).
Aperture Investors UK Ltd is authorized as Investment Manager in the United Kingdom, regulated by the Financial Conduct Authority (FCA) – (135-137 New Bond Street, London W1S 2TQ, United Kingdom – UK FCA Reference n°: 846073 – LEI: 549300SYTE7FKXY57D44). Aperture Investors, LLC is authorized as investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) which wholly owns Aperture Investors UK, Ltd, altogether referred as “Aperture”.
Sycomore Asset Management (“Sycomore AM”) is authorized as UCITS management company and Alternative Investment Fund Manager (AIFM) in France for Sycomore Sustainable Tech, regulated by the Autorité des Marchés Financiers (AMF) - 14 avenue Hoche 75008 Paris, France - AMF code: 1115835, LEI: 9695006BRVMTPTUB1R68.
For Aperture Investors SICAV: Before making any investment decision, investors must read the Prospectus, their SFDR Appendices and the Key Information Documents (“KIDs”). The KIDs are available in one of the official languages of the EU/EEA country, where the Funds are registered for distribution, and the Prospectus/ SFDR Appendices are available in English (not in French), as well as the annual and semi-annual reports at www.generali-investments.lu or upon request free of charge to Generali Investments Luxembourg S.A., 4 Rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg, e-mail address: GILfundInfo@generali-invest.com. The Management Company may decide to terminate the agreements made for the marketing of the Fund. A summary of your investor rights (in English or an authorized language) is available at www.generali-investments.lu in the section “About us/Generali Investments Luxembourg”. A summary of the SFDR Product Disclosures (in English or an authorized language) is available under the Funds page of the website in the “Sustainability-related disclosure” section.
For Sycomore Asset Management: Before making any investment decision, investors must read the Prospectus, their SFDR Appendices and the Key Information Documents (“KIDs”). The KIDs are available in one of the official languages of the EU/EEA country, where the Funds are registered for distribution, and the Prospectus/ SFDR Appendices are available in English (not in French), as well as the annual and semi-annual reports at https://en.sycomore-am.com/ or upon request free of charge to Sycomore Asset Management, 14 avenue Hoche 75008 Paris, France e-mail address: info@generali-invest.com. The Management Company may decide to terminate the agreements made for the marketing of the Fund. A summary of your investor rights (in English or an authorized language) is available at https://en.sycomore-am.com/. A summary of the SFDR Product Disclosures (in English or an authorized language) is available under the Funds page of the website.
This marketing communication is not intended to provide an investment, tax, accounting, professional or legal advice and does not constitute an offer to buy or sell the Funds or any other securities that may be presented. Any opinions or forecasts provided are as of the date specified, may change without notice, may not occur and do not constitute a recommendation or offer of any investment. Past or target performance do not predict future returns. There is no guarantee that positive forecasts will be achieved in the future. The value of an investment and any income from it may go down as well as up and you may not get back the full amount originally invested. The future performance is subject to taxation, which depends on the personal situation of each investor and which may change in the future. Please liaise with your Tax adviser in your country to understand how your returns will be impacted by taxes. The existence of a registration or approval does not imply that a regulator has determined that these products are suitable for investors. It is recommended that you carefully consider the terms of investment and obtain professional, legal, financial and tax advice where necessary before making a decision to invest in a Fund.
Generali Investments is a trademark of Generali Asset Management S.p.A. Società di gestione del risparmio, Generali Investments Luxembourg S.A. and Generali Investments Holding S.p.A. - Sources (unless otherwise specified): Aperture, Sycomore AM and Generali Asset Management S.p.A. Società di gestione del risparmio - This document may not be reproduced (in whole or in part), circulated, modified or used without prior written permission.
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