I remember watching a documentary at school on Bill Gates - one scene in particular has always stayed with me. In it, Gates takes the camera on a tour of his house, explaining how the rooms adjust the temperature to his preference, and how he chats with his fridge about the week’s shopping list. Even the pictures on the wall change depending on who is in the room.
It was the first time I had seen a true example of the Internet of Things (IoT) in action and I couldn’t believe what I was seeing but, of course, if anyone was going to own a home like this, it was going to be the head of Microsoft.
I thought back to that scene this week, as my thermostat app kicked in when I entered the kitchen, the lights flicked on and I asked Alexa to choose some music for me. Not quite the same but, incredibly, not far off.
The Internet of Things (IoT) has evolved from a tradeshow catchphrase to a very real part of everyday life, and the growth has shown no signs of stopping. Whether it’s the vast expansion in smartphone capabilities or the steady progress in the connectivity of home appliances, we’re closer to full digital integration than we’ve ever been.
The companies supporting the evolution in the space range from hardware technicians to e-commerce, telecoms and software developers across the tech sector. Fund managers with an eye on the changes these companies are bringing about are paying close attention to where the opportunities for investment are right across the supply chain. Here are three funds from the Fidelity Select 50 with meaningful exposure to the IoT story.
One of the largest component suppliers to the biggest smartphone names out there, Taiwan Semiconductor Manufacturing Co. (TSMC) is no stranger to Asian funds or those in the tech sector. Its industrial output directly benefits the fundamental hardware found in smartphones, tablets, smartwatches and a range of internet-connected objects, attracting the attention of Fidelity manager Nick Price.
Price complements this hardware element of the portfolio with a firm whose tech side focuses more on software and e-commerce apps, Alibaba.
The fund names the Chinese giant as one of its top holdings, with the manager buoyed by its ability to inject itself into everyday life, through the likes of its mobile payment division Alipay being used from luxury boutiques to street food vendors.
The growth of Alibaba over the past five years is impressive but perhaps not so surprising when we consider the size and influence of the company in the e-commerce space. With no natural predator in China, Jack Ma’s online marketplace easily dominates the field but it’s hard to put into perspective the scale of the company’s operations.
The number of annual active consumers on the company’s retail platform reached 552 million in March, an increase of 98 million on the previous year. And subsidiary marketplace Taobao saw 617 million monthly users too, making it the world’s biggest e-commerce website.
Samsung is another of Price’s top names. As a leading name in smart devices, including vacuum cleaners, washing machines and fridges, the firm goes far beyond its headline phone business. Samsung Connect Home even serves as a wi-fi router where all of your smart home devices can gather and communicate, making device management and integration even easier.
The manager is supported by Fidelity’s global emerging markets analysts who scour their respective regions for the best opportunities to include in one of three regional funds. Price then selects the best ideas for his global portfolio from these regional pools.
This two-step process means Price only takes the very best ideas from each region. Before a stock is even considered for his portfolio, it has already been vetted by a regional fund manager and the local analyst team.
Like Price, manager Suranjan Mukherjee counts TSMC, Alibaba and Samsung as three of the top names in the Fidelity Asian Special Situations fund. One notable addition in the top ten holdings is tech behemoth Tencent, whose businesses include instant messaging app WeChat and China’s leading online payment platform Tenpay. Although, the company has significant interests in entertainment, imaging software, and artificial intelligence.
Arguably the biggest name in Chinese tech, Tencent is already at the heart of everyday life for hundreds of millions of people. As Dale Nicholls, manager of the Fidelity China Special Situations investment trust, explained recently, “You see both Tencent and Alibaba clearly on the way to generating yearly cash flow of $10bn which is a multiple of the likes of Amazon, just to give you an indication of the strength of these business models and how they continue to grow.”
Mukherjee also holds state-owned telecoms company China mobile in the fund. The firm is the largest mobile telecommunications corporation by market capitalisation and also the world's largest mobile phone operator by total number of subscribers, with over 902 million subscribers as of June 2018.
“We are pragmatic investors,” says co-manager Chris Field, “We don’t have any style bias. The kind of companies we’re looking for are those that other investors are misunderstanding. We invest where we can see a valuation gap that can narrow through a catalyst we can identify.”
One example fitting the bill for Field and co-managers Richard Staveley, James de Uphaugh and Matthew Smith, is FTSE 100 firm Vodafone. With phones and access to high speed mobile internet at the forefront of full interconnectivity, the mobile giant looks set to benefit.
With another top ten holding in French-listed Orange, a current overweight position for the fund is in the telecoms sector, which the managers believe has been unfairly treated by investors. A regulation crackdown that removed many of the easy ways for telecoms companies to make money has put many off the sector, but Field and co believe this is now fully priced in. What’s more, the fundamentals for telecoms appear to be improving, as governments recognise the important role high speed broadband plays in modern economies.
The Majedie fund invests in the UK but is international in many ways. Firstly, because the blue-chip names it often buys derive much of their profit from overseas but also because the fund holds some names from non-UK markets. The fund currently holds 10% outside of the UK, but has the mandate to raise this to 20% if the managers wish to.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.