Each week, professional investors tell us where they’d put their money. This week: Matt Tonge & Victoria Bates of Liontrust.
As markets see-saw in the face of commodity price swings, diverging global interest rates, fears over Brexit and conflicting economic data, it becomes even more important to avoid short-term thinking and instead drill down into what you believe makes for a solid long-term investment. For us, that means companies with significant intangible barriers to competition, which can protect their market position and pricing power, even amid wider economic woes.
One intangible asset we like to see is an embedded distribution network: this is often associated with companies that extract value from data. The amount of generated data is accelerating, and it is vital for businesses to manage and make best use of it all. One key company here is market research specialist YouGov (LSE: YOU), which provides information on end customers and markets to companies and media agencies.
YouGov has a panel of more than four million members around the world, and collects data daily from them on a broad range of subjects. Its brand tracking, customer profiling and market information expertise can quickly become ingrained within its customers’ workflows, helping to shape both strategic thinking and marketing activity. With a strong balance sheet, improving margins and double-digit forecast earnings growth, this is a quality business to buy for the long term.
Another firm that helps businesses to use data more effectively is fast-growing software group DotDigital (LSE: DOTD). One of its key intangible barriers to competition is the rich intellectual property in its core product, Dotmailer. This software enables interaction between marketers and customers across several channels (email, mobile, social media, etc) to improve lead generation, conversion and retention.
Data from a wide range of sources enables marketers to create campaigns tailored to the recipient’s preferences. Turnover and profits are growing at around 30% a year. The company holds net cash of almost £15m. Visibility is excellent too: 77.5% of revenue is sold on a monthly recurring software-as-a-service model.
Contracted recurring revenue like this is another of the most attractive intangible assets a business can have, which is why we like Nasstar (LSE: NASA), a hosted desktop and cloud computing business. Cloud computing is becoming ever more popular as business owners recognise the benefits of a scalable pay-per-use model.
Nasstar targets small businesses in sectors such as legal, finance and recruitment, where complexity of delivery and a need for good customer service provides significant barriers to entry. With typical customers paying on a monthly basis over the duration of three- to five-year contracts, the company enjoys recurring revenue of almost 90%.