We live in a golden age of unprecedented technological change. Smart investors should get in early, says Jim Mellon.
Back in 2012 my collaborator, Al Chalabi, and I wrote a book about the life sciences sector called Cracking the Code. There has been a huge bull market in this sector since. We can’t claim credit for that, but the publication was certainly timely for us.
Our investments in the sector have done very well (see below for the performance of the portfolios we suggested in the book).
With that in mind, we have been looking for the next big money fountains we might be able to buy for ourselves and to suggest to you.
That hasn’t been as hard as you might think: it turns out that there are a number of exciting sectors undergoing a major transformation as they benefit from increased machine intelligence and expanded human knowledge.
The life science sector is still phenomenally exciting, but the other sectors are also characterised by truly amazing new technologies. All of them offer interesting investment opportunities for the far-sighted and patient; and all will transform the world we know today, and will do it much faster than most people think.
Productivity growth, which has been poor around the world for some time now, is likely to accelerate, creating real economic benefits for many countries.
This isn’t all good news. There will be consequences to these transformations, ranging from geopolitical to demographic, and they will change the way humans work and conduct their lives. Automation will mean that a good many jobs will be axed.
At the same time, increased use of robots and automation will certainly make life harder for emerging nations that have relied on cheap labour-based exports. This is going to be particularly tough for Africa, the continent with the highest population growth in the world.
Note that in France and the US, jobs in McDonalds are already being automised – low paid jobs are disappearing as traditional labour is replaced by capital. That capital keeps getting cheaper at the same time as machines become faster and better.
Other jobs might go too: futurist and technology inventor Ray Kurzweil posits that once artificial intelligence (AI) surpasses human intelligence (a point known as the Singularity and expected by around 2045), it is curtains for the human race.
At this point, superior intelligence would continuously redesign itself to be ever more intelligent, rendering us humans redundant. We will have transcended our biological destiny, but not necessarily to our benefit.
We are not convinced that the future is this gloomy (nor do we think of the Singularity in the odd quasi-religious way others do). However, there is no doubt at all that superintelligence is on the way.
This might take the form of much faster processing speeds than we are capable of (in the vein of IBM’s Watson supercomputer). It could be a collective intelligence that harnesses many people’s combined intelligence to form a single super-intelligence. Or it could be just that future super-intelligence will be qualitatively superior to any known human intelligence.
That doesn’t have to be scary: instead, we think that the outcome will be benign and lead to advances in technology and the life sciences at a pace that we cannot contemplate today.
Let’s not forget that while technology and disruption can make some people super-rich, it tends to benefit us all along the way: most people already have a mobile phone, half of the world’s population is online, health and life expectancy have improved almost everywhere, and fewer people around the world face starvation.
The fact is that innovators, doers and disrupters need consumers to buy the goods their companies produce. Users of Facebook, for instance, recognise that they are the product, or at least their “eyeballs” are. The disrupters need us to make their businesses work – and they know it.
At the same time, while real wages might not rise fast from here, we’ll buy goods and services that are cheaper and better than those of the past – many of these new goods will be produced by robots.
We will then be freed from menial and repetitive work to focus on the kind of work in which human experience matters (care, medicine, education, sales, marketing and the like).
By now you will be itching to invest in the things that excite us so much. Here, however, I do have some bad news.
In almost all the disruptive technologies we have researched, we have found that the big boys are crowding out the individual investor from many of the best opportunities. Why? Because capital and technological power now lies in relatively few hands.
So when a new technology comes along that is developed outside of what we might describe as the behemoth brothers (the likes of Google, Apple, Alibaba, SoftBank and Facebook), it often gets snapped up by one of them before investors get a chance to purchase equity in public markets.
If some of these companies do manage to go public without being swallowed up, they are often already large and have much of the upside already priced in. So the only winners are the early-stage venture capital investors, who are often drawn from the same magic circle of tech names.
Twitter, Alibaba and LinkedIn are good examples. All three went public at eye-watering valuations, with their early supercharged growth days well behind them.
Then look at Google – it has snapped up many of the interesting companies in robotics and in the ‘internet of things’. Facebook has done the same in virtual reality, and Amazon and SoftBank in areas related to their businesses. The result? It is increasingly difficult for individuals to invest in disruptive technology companies.
So how do we invest? We start with Google. It is the best connected and possibly the smartest company on the planet. One thing Google does is to hire great people who are given the creative freedom to visualise the future: they imagine what key products might look like five to ten years ahead and reverse engineer them to create a path to the future.
So in their famous X Labs they’ve produced Google Glass, driverless cars, contact lenses monitoring glucose for diabetics, products linked to the internet of things, internet service from balloons, and voice recognition systems.
Some products fail (think jet packs), but the company feels that vision requires an ability to accept defeat and move on. It is looking at global markets of infinite scale for innovative products. We want to be part of this too – Google is a core long-term investment for us.
But we want to do more than invest in Google, we want to think like Google. We want to think we live in a golden age of unprecedented change – change that we need to embrace quickly. The future is coming to us faster then most people realise.
The easiest areas in which private investors can think and invest like Google are life sciences and payment systems. In Cracking the Code, we predicted an accelerated pace of medical technologies and an unprecedented expansion of human life span. At the time we were thinking of a ten to 20 year timeframe.
But some amazing breakthroughs have already been made. There is now a cure for Hepatitis C, for example. It costs $80,000 a patient, but if you have the disease and you have money, you can be cured. Stem cells are close to being used in therapeutic contexts.
And cancer is well and truly on the run for the first time with immunotherapy, which leverages the body’s immune system to fight the disease, soon to be the dominant factor in oncology. A listed company called ImmunoGen (NYSE: IMGN) is an interesting player in this space.
Biomarkers, which help doctors pick up cancer earlier, are also important (keep an eye on an Italian firm called Gensignia, which works in this area and may soon list in London).
There are also amazing new drug delivery systems being invented: one 18-year-old Polish researcher has developed a way of using gold nano-particles embedded in nano-tubes to deliver chemotherapy drug doxyrubicin to specific tumour sites.
All of this is exciting and means the goal of most of us being able to live a long life is in sight. Seventy is no longer the age at which we enter general decline and the time when we’ll see average life expectancy of over 120 is within reach. What’s making this happen?
The unveiling of human DNA followed by the sequencing of the human genome have provided us with the body’s blueprints. Combine that with the growth of computer processing power – which allows us to decipher the language of the blueprints – and you have the answer.
The other area well worth looking at is payment systems – the future doesn’t really involve cash. The replacement of physical money with mobile money (m-money) will be a huge change.
The fat margins of the main retail banks will be reduced by peer-to-peer lending, crowd funding and the rise of new cryptocurrencies. Every aspect of money and its transmission, along with the financial industry, is evolving into something new.
Already, contactless payments with cards or phones is becoming common and ordinary banking is migrating to the internet. Within 15 years we think cash will be redundant.
At the same time, as peer-to-peer lending surges, traditional lending will become a thing of the past. You don’t want to be invested in traditional banks in an environment such as this. But you do want to invest in disruption and innovation.
We’re interested in all sorts of firms in the area. In the UK, Powa (as yet unlisted) has a mobile payments technology that lets you buy things on the spot by pointing your phone at them – and we are convinced Bitcoin will gain traction. See the table below for some of our favourite investments in the area.
The 12 investments to buy now
I mentioned Google above, but it isn’t the only big company we believe is worth holding over the next five to ten years. Cisco (NYSE: CSCO) is another favourite – it is set to be one of the big leaders in the creation of the expansion of the infrastructure needed for the internet of things.
Its equipment connects manufacturing floors, energy grids and health-care facilities to the internet. As it says in its mission statement, if you can represent an object digitally, you can control it from anywhere. We like the sound of that.
We also like Hitachi (NYSE: HTHIF). It is at the forefront of creating new transport systems, and high-speed trains (now seeing a revival in interest) in particular.
Then there is ARM Holdings (LSE: ARM). It’s a leader in mobile chip design, and we think it’ll be a huge player in the internet of things.
Among the smaller firms there are scores of contenders for our favourites list (see the book for the rest!), but I like Orbital Sciences Corporation (NYSE: ORB), which has developed the Cygnus rocket, which it operates under a $1.9bn contract with Nasa.
Next is Tokyo-listed GS Yuasa (JP: 6674). It makes innovative batteries and should benefit from the rise of electrical vehicles.
Summit PLC (LSE: SUMM), of which I am a director, is another favourite. It is working on drug development for Duchenne Muscular Dystrophy, an illness that affects 500,000 boys worldwide. It also has a promising new antibiotic in development, as well as excellent management and adequate cash to take it through significant trials.
Sangamo BioSciences (NYSE: SGMO) is more of a speculative buy in the life science sector. The company is using something called Zinc Finger Nuclease technology to engineer a natural mutation in the immune system of HIV patients.
This is not yet a proven cure for Aids, but so far is has shown considerable promise. It also isn’t the only string to Sangamo’s bow: it is a platform company with other interesting possibilities on the horizon.
In the payment systems sector, Monitise (LSE: MONI) is still an interesting play. It has a strong alliance with IBM and worthwhile partnerships with several leading financial institutions.
Two others to look at in this area are Worldline (Paris: WLN), which specialises in mobile payments for retailers, hoteliers and transport firms, and as such is right at the heart of the cashless economy, and Coupons.com (NYSE: COUP).
The latter produces digital coupons for customers to “clip” and use as they shop. It might not be one to buy immediately – it is expensive. But keep an eye out for buying opportunities.
Otherwise, we are interested in investing in the disruption in finance and payments with Aim-listed investment company GLI Finance (LSE: GLIF). It has invested in several peer-to-peer lending platforms, including FundingKnight and Platform Black, an invoice financing company.
Those interested in robotics might like to spread their risks with an interesting Global Robotics and Automation Index ETF (Nasdaq: ROBO) just listed by a Texan company. The annual charge is 0.95%.
How we did last time
In 2012 we published Cracking the Code, in which we suggested a few portfolios for the life science sector. The “balanced” version had 18 stocks in it – the chart below shows their performance over the last two years.
| Weighting | Currency | Share price 31/07/2012 | Share price 31/07/2014 | % change |
|---|---|---|---|---|
| Alnylam | USD | 18.69 | 54.11 | 190 |
| Amgen | USD | 82.6 | 127.39 | 54 |
| Astellas | JPY | 746 | 1,415.5 | 90 |
| Celgene | USD | 34.23 | 87.16 | 155 |
| Forest Labs | USD | 33.55 | 89.48 | 167 |
| Gilead | USD | 27.17 | 91.56 | 237 |
| GlaxoSmithKline | GBP | 1,468.5 | 1437 | -2 |
| ISIS | USD | 12.12 | 30.99 | 156 |
| Pfizer | USD | 19.74 | 28.71 | 45 |
| Rigel | USD | 10.94 | 3.27 | -70 |
| Roche | CHF | 173.3 | 265.7 | 53 |
| Shire | USD | 86.18 | 246.51 | 186 |
| Vertex | USD | 48.51 | 88.92 | 83 |
| AmpliPhi | USD | 0.19 | 0.335 | 76 |
| Arrowhead Research | USD | 3.7 | 12.66 | 242 |
| Complete Genomics | USD | 2.27 | 3.15 | 39 |
| Medivation | USD | 49.85 | 74.23 | 49 |
| NanoViricides | USD | 0.51 | 40.7 | 898 |
• Jim Mellon is the author of the forthcoming Fast Forward: The Technologies and Companies Shaping Our Future (Fruitful Publications).
• To see the list of all the robotics stocks that Jim Mellon suggests, see The nine best robotics stocks.