The single largest sector exposure of the VT Downing Unique Opportunities Fund, which launched in March 2020 into the teeth of the Covid-19 pandemic, is Information Technology. At the end of July, Technology accounted for 25% 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 ONS, in February 2010, internet sales were 6.8% of all UK retail sales, and over the succeeding ten years that proportion has steadily risen, hitting 19% in February this year. Since lockdown that percentage has, unsurprisingly, jumped to over 30%, and a June survey for Barclaycard indicated that 56% of UK consumers continued to avoid shops. Dunelm, a category killer in homewares with an 8.7% share of the UK market, has seen online sales rise 105% year on year in the quarter ended 27th June 2020, while like for like store sales fell 53% in the same period. This is not so surprising, but since physical stores re-opened, online sales for home delivery have been circa 30% of the total and click and collect sales a further 12%.
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% of Games Workshop’s revenues came from its own physical stores and a further 52% 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% 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 and 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.
Risk warning: Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term and are higher risk compared to investments solely in larger, more established companies. Diversification may not be achieved and investments may be in the same sector. Opinions expressed represent the views of the Fund Manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein.
Important notice: This document is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.