Yahoo Finance ‘Netflix is down 60pc, but it will keep on growing’
Picking stocks that can beat the rest of the market is a notoriously difficult task. But get it right and a truly disruptive, innovative company can supercharge investor returns.
James Dowey, who co-manages the Liontrust Global Innovation fund with former Olympian rower Storm Uru, said that finding a truly innovative company is the key to beating the rest of the stock market.
Although his fund has suffered this year, its long-term track record presents an attractive option for investors willing to take a punt on nascent stocks. It has returned nearly 600pc since its inception in 2001, beating the rest of the stock market by a huge 271 percentage points.
Mr Dowey tells Telegraph Money how he finds those hidden gems and why British companies can shake off their boring tag.
Who is the fund for?
We invest in innovative companies, because we believe they can achieve superior returns. This does not mean that we invest in just technology. True innovation is more than that: it happens in every sector of the economy. An innovator provides genuine customer value, by either driving down prices – like Amazon did – or, it drastically improves the quality of a product or service. We see innovation as the ultimate mark of quality in a business and the best driver for growth.
How do you pick stocks?
We look for four things. First is innovation: we want to own companies that are creating value for customers by coming up with new ideas that lower prices or enhance quality. The second is high barriers to entry for competition. The new idea must be difficult to replicate because if any business can do the same thing, then it will be difficult for it to make money. Third is good management, and finally we want to see hard evidence of strong cash returns.
Are innovators always young companies?
We are looking for disrupters, but a decent track record is vital. Waiting doesn’t always cost you a lot. If you ignored Amazon for the first 10 years after it went public, you still would have made 47 times your money since then. So we prefer reducing our risk by waiting a little longer to invest.
We typically invest in billion dollar companies. This is because the biggest businesses are best positioned to disrupt industries, because they have the scale and resources. Take Nvidia for example: it specialised in making computer chips for the gaming industry, but now its technology supports artificial intelligence technology across every sector.
Have you used recent market falls to buy more stocks?
Yes, first in high-quality, defensive companies with exceptional barriers to competition. Some share prices had fallen by 30pc this year, opening up a rare window to buy in. We have bought Universal Music Group, which has innovated through the past 25 years of tumultuous change in the music industry as it shifted from CDs to streaming.
We have also bought higher growth companies, such as Twilio. This is a tech stock that makes communication software. It reduces communication costs for its clients by about 90pc, which is a huge saving, and will be very important for businesses trying to navigate a high-inflation environment.
How worried are you about inflation and a recession?
Our stocks have managed inflation very well: in the past three months, 90pc of them beat earnings estimates. This is down to the nature of innovative businesses. They drive down prices for customers, which is highly valued at the moment.
British stocks make up just 2pc of the fund: are we bad at innovation?
Britain does have a very innovative history, but in the past couple of decades it has punched below its weight. This is because the market here is much smaller than say the US or China. Innovative businesses usually thrive when they have a large home market and can scale quickly.
But we do see opportunities. We invested in the British technology company Wise, which is driving down the price for consumers transferring money between countries. This is something that historically banks have made very expensive, and Wise is disrupting the status quo.
What are your best and worst investments?
The best has been Nvidia, which is up 330pc in the past three years after it adapted and found new customers. One of the worst has been Netflix, which is down 60pc so far this year. But we are sticking with it because its new tiered subscription model can keep it growing.
