Future Returns: Seeking Out Tech Trendsetters
Where to look for the next big tech trend.
3 min
While many investors are focused on Facebook, Alphabet’sGoogle, Netflix, and other large tech companies that seem to change society daily, there are hundreds of smaller, under-the-radar companies that are transforming even mundane businesses such as mortgage applications into software companies.
Eaton Vance WaterOak Advisors, a US$14.3 billion registered investment advisor for wealthy individuals, foundations, and institutions, seeks out these smaller “analog-to-digital” companies across all of its investment strategies, says Duke Laflamme, chief investment officer of the firm, an arm of Boston-based asset manager Eaton Vance.
“We think there are a lot of companies out there that are smaller, less followed, and very similar in a lot of regards to some of the larger players that are getting all the attention,” Laflamme says.
Eaton Vance WaterOak owns larger, growth tech companies, too, including Netflix and Facebook, but says they will always be asking, “Is there something that has a clear path to a higher growth rate with great management?”
Penta recently spoke with Laflamme about the investment firm’s approach and the kind of companies it chooses.
Streamlining in Any Sector
Eaton Vance WaterOak’s premise is that “most companies are becoming software companies to a certain degree,” Laflamme says.
They are doing so to be more efficient—and therefore more profitable—and to improve the experience of their customers. These impulses are altering the trajectory of consumer-facing companies and industrial firms that can employ technology to streamline processes.
“We’re looking at it from the perspective of, ‘let’s find great companies that are already great companies, and see what they are doing in terms of some sort of transformation to make them even better,’” Laflamme says.
Take the unwieldy process of applying for a mortgage, which can involve lengthy sittings in legal offices signing documents “that no one really reads,” Laflamme says. “If you can digitize some of that, it’s a great way to improve the efficiency of that process.”
Black Night, a Jacksonville, Fla., company has capitalized on providing that efficiency with mortgage and consumer loans, from the point of origination to loan servicing and processing. The firm also provides mortgage lenders with insight on potential problem loans, Laflamme says. “It’s an end-to-end solution.”
A Pandemic Push
A theme during the height of the pandemic was how lockdowns to contain the spread of the virus speeded the digital transformation of many sectors of the economy. Zoom and Google Meet conferencing became the norm, art fairs and museums went digital, and more restaurants went online.
These dynamics benefited companies that already had been shifting to digital services, and helped others that were able to quickly adjust when the lockdowns went into effect.
Domino’s Pizza is an example of the latter, LaFlamme says. In the midst of the pandemic, “They really transformed the efficiency of their technology through [their] app, website, etcetera,” he says. “They now have a consumer base that is likely to stick with them through post-pandemic.”
Digital Stickiness
The investment firm likes companies that are nimble, and can create a moat around their business with that kind of customer “stickiness” through the use of technology, essentially making themselves the go-to provider in their sector, Laflamme says.
An example is Intuitive Surgical, a Sunnyvale, Calif.-based company that is a leader in providing robotic surgical equipment. If a doctor is trained by Intuitive Surgical on its machinery, he or she is unlikely to switch to another company that comes along with the same type of product, he says.
While competitors to Intuitive are coming out, they are “behind pace on adoption,” Laflamme says. “If Intuitive is the gold standard and you are a doctor and you get trained on the gold standard, if an equal [company] comes along, there’s no reason to get that training as well.”
Other companies the firm likes include Watsco, an air conditioning, heating, and refrigeration equipment distributor based in Miami, that has created a just-in-time inventory system allowing plumbing and heating providers to get what they need when they need it.
“It’s one of these smaller, sleepy companies that you wouldn’t think of as a tech company that is transforming themselves and getting to be even better companies through that technology,” he says.
Another is Ritchie Bros. Auctioneers in Burnaby, Canada, which sells heavy equipment via auctions. “They’ve done a good job of taking one of the oldest-school processes out there and bringing it into this century,” Laflamme says.
An advantage of the improved efficiencies and lower costs generated by the tech transformation is the deflationary effects it has on the economy. By reducing the amount of time and labour it takes to process a mortgage, for instance, many more mortgages can be processed. “There’s a lot that can be wrung out of the system,” he says.
Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: June 25, 2021
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Government spending, including Biden’s Inflation Reduction Act, has helped drive a gap between clean-energy spending and fossil-fuel investments
3 min
Investments in solar power are on course to overtake spending on oil production for the first time, the foremost example of a widening gap between renewable-energy funding and stagnating fossil-fuel industries, according to the head of the International Energy Agency.
More than $1 billion a day is expected to be invested in solar power this year, which is higher than total spending expected for new upstream oil projects, the IEA said in its annual World Energy Investment report.
Spending on so-called clean-energy projects—which includes renewable energy, electric vehicles, low-carbon hydrogen and battery storage, among other things—is rising at a “striking” rate and vastly outpacing spending on traditional fossil fuels, Fatih Birol, the IEA’s executive director said in an interview. The figures should raise hopes that worldwide efforts to keep global warming within manageable levels are heading in the right direction, he said.
Birol pointed to a “powerful alignment of major factors,” driving clean-energy spending higher, while spending on oil and other fossil fuels remains subdued. This includes mushrooming government spending aimed at driving adherence to global climate targets such as President Biden’s Inflation Reduction Act.
“A new clean global energy economy is emerging,” Birol told The Wall Street Journal. “There has been a substantial increase in a short period of time—I would consider this to be a dramatic shift.”
A total of $2.8 trillion will be invested in global energy supplies this year, of which $1.7 trillion, or more than 60% will go toward clean-energy projects. The figure marks a sharp increase from previous years and highlights the growing divergence between clean-energy spending and traditional fossil-fuel industries such as oil, gas and coal. For every $1 spent on fossil-fuel energy this year, $1.70 will be invested into clean-energy technologies compared with five years ago when the spending between the two was broadly equal, the IEA said.
While investments in clean energy have been strong, they haven’t been evenly split. Ninety percent of the growth in clean-energy spending occurs in the developed world and China, the IEA said. Developing nations have been slower to embrace renewable-energy sources, put off by the high upfront price tag of emerging technologies and a shortage of affordable financing. They are often financially unable to dole out large sums on subsidies and state backing, as the U.S., European Union and China have done.
The Covid-19 pandemic appears to have marked a turning point for global energy spending, the IEA’s data shows. The powerful economic rebound that followed the end of lockdown measures across most of the globe helped prompt the divergence between spending on clean energy and fossil fuels.
The energy crisis that followed Russia’s invasion of Ukraine last year has further driven the trend. Soaring oil and gas prices after the war began made emerging green-energy technologies comparatively more affordable. While clean-energy technologies have recently been hit by some inflation, their costs remain sharply below their historic levels. The war also heightened attention on energy security, with many Western nations, particularly in Europe, seeking to remove Russian fossil fuels from their economies altogether, often replacing them with renewables.
While clean-energy spending has boomed, spending on fossil fuels has been tepid. Despite earning record profits from soaring oil and gas prices, energy companies have shown a reluctance to invest in new fossil-fuel projects when demand for them appears to be approaching its zenith.
Energy forecasters are split on when demand for fossil fuels will peak, but most have set out a timeline within the first half of the century. The IEA has said peak fossil-fuel demand could come as soon as this decade. The Organization of the Petroleum Exporting Countries, a cartel of the world’s largest oil-producing nations, has said demand for crude oil could peak in developed nations in the mid-2020s, but that demand in the developing world will continue to grow until at least 2045.
Investments in clean energy and fossil fuels were largely neck-and-neck in the years leading up to the pandemic, but have diverged sharply since. While spending on fossil fuels has edged higher over the last three years, it remains lower than pre pandemic levels, the IEA said.
Only large state-owned national oil companies in the Middle East are expected to spend more on oil production this year than in 2022. Almost half of the extra spending will be absorbed by cost inflation, the IEA said. Last year marked the first one where oil-and-gas companies spent more on debt repayments, dividends and share buybacks than they did on capital expenditure.
The lack of spending on fossil fuels raises a question mark around rising prices. Oil markets are already tight and are expected to tighten further as demand grows following the pandemic, with seemingly few sources of new supply to compensate. Higher oil prices could further encourage the shift toward clean-energy sources.
“If there is not enough investment globally to reduce the oil demand growth and there is no investment at the same time [in] upstream oil we may see further volatility in global oil prices,” Birol said.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
