The single largest sector exposure of our fund is in information technology and at the end of July, technology accounted for 25 per cent by value of net assets. Most of this exposure consists of software companies, which typically dominate a particular industry niche.
The attraction of these businesses is that once the software is installed, it becomes integral to the customer’s operations and switching to a different provider is costly.
An example to illustrate the point would be Tracsis, which amongst other products, supplies Network Rail and the train operating companies with software to manage timetabling, manpower and rolling stock planning, and to monitor real-time performance. No matter how busy the trains are (or not at the present time), these systems are core to running our rail network. Switching to a different system would be a major headache for management.
However, technology doesn’t just feature in the sector that bears its name. There is a long-term trend to the substitution of physical processes with digital ones, and the pandemic has accelerated that process in many areas.
For example, in retailing, according to the Office for National Statistics, in February 2010, internet sales were 6.8 per cent of all UK retail sales, and over the succeeding 10 years, that proportion has steadily risen, hitting 19 per cent in February this year.
Since lockdown that percentage has, unsurprisingly, jumped to over 30 per cent, and a June survey for Barclaycard indicated that 56 per cent of UK consumers continued to avoid shops.
Dunelm, a category killer in homewares with an 8.7 per cent share of the UK market, has seen online sales rise 105 per cent year-on-year in the quarter ended 27 June 2020, while like for like store sales fell 53 per cent in the same period. This is not so surprising, but since physical stores re-opened, online sales for home delivery have been circa 30 per cent of the total and click and collect sales a further 12 per cent.
In leisure goods, Games Workshop manufactures and sells fantasy miniature toy soldiers. It is a physical hobby, involving the collecting of armies, the creation of battle scenery, the painting of the soldiers, the playing of a physical game. In 2019/20, 29 per cent of Games Workshop’s revenues came from its own physical stores and a further 52 per cent from sales to independent retailers. However, significantly, the company is increasingly licensing its intellectual property to developers of digital video games, with 73 licenses issued and new ones being signed every 2-3 months. Royalty income in 2019/20 jumped 49 per cent from £11.3m to £16.8m.
Another area where digital opportunities are growing is in defence. Chemring is known for its expertise in countermeasures, such as manufacturing chaff to protect physical military aircraft from attack. However, it is the sensors & information division which is the focus for long term growth according to the group’s 2019 annual report, “in the areas of electronic warfare, cyber-security and data science”.
Digitalisation is here to stay, indeed if anything it is accelerating as a consequence of the pandemic. What is more, you don’t need to invest in the US in the ‘Big Five’ technology giants (Alphabet, Apple, Amazon, Facebook, Microsoft) in order to enjoy the ride.
Originally posted here