Kerr Neilson: Capitalising on technology-driven megatrends

Photo of Kerr Neilson, Platinum Asset Management By Kerr Neilson, Platinum Asset Management

min read

Digitisation is the underlying driver for the most exciting investment themes today.

Spurred by the state of synchronised growth across the world’s major economies, global equity markets rewarded investors with excellent returns in 2017 and, indeed, over the past five years.

Years of frenzied bond-purchasing by central banks has on the one hand allowed various industries to find cheap financing and, on the other, forced investors to reach for yield.

Investors nevertheless remained, in our view, largely cautious about the prospects of future returns from owning shares, and the volatility that momentarily seized the market at the start of February in part reflected concerns with the well-known risk of the return of inflation and rising interest rates.

However, the backdrop of broad-based dependable economic growth remains unchanged: the Chinese economy continues with its unremitting expansion; commodity prices are expected to remain buoyant, helped by China’s capacity reduction measures, increased demand for various metals driven by alternative energy production and a lack of investment in new supply in recent years.

Looking beyond the near term, at the core of the investment themes that we at Platinum are finding most exciting today, is digitisation. Autonomous driving, additive manufacturing, generative design, and the smart factories of Industry 4.0; the notion of creative destruction, described by Joseph Schumpeter as the process of industrial mutation that incessantly revolutionises the economic structure from within, rings loudly in this digital age.

Innovation and the rate of change are obviously important from an investment perspective. New companies will emerge, offering spectacular returns, and in many instances, it will be at the cost of other companies that will struggle to stay relevant.

We have all lived through the commercialisation of the internet that culminated in the dot-com bubble but set in motion entirely new industries and businesses such as e-commerce, enterprise software and social media. That revolution was followed by another with the proliferation of smart phones. Companies such as

Microsoft, Google and Facebook as well as Tencent and Alibaba in Asia, have provided alert investors with magnificent returns. But what’s next?

An aspect worth emphasising is the immediacy of some of these emerging opportunities. The developments mentioned below are already in the mainstream or will be within two to three years, which accords with the approximate time horizon of sharemarkets.

AI and autonomous driving

Consider artificial intelligence (AI). Some of the neural network algorithms stealing headlines today were formulated as early as the 1960s but lay dormant until the present decade, when they were brought to life by the availability of big data and the use of graphic processing units (GPUs).

GPUs are a specialised type of microchip originally designed for video games, but have proved to be well-suited to machine learning, enabling computers to see, converse, navigate and create. The application of these AI capabilities is in turn accelerating multitudes of other developments.

Most notable is how far autonomous driving technology has progressed since it came into the public’s purview just a few years ago. During Waymo’s (a Google spin-off) test drives in California throughout 2017, its self-driving vehicles on average travelled nearly 6,000 miles without needing a human driver to take over1.

Autonomous driving is not some distant moon-shot experiment. It is real and is here now. Level 3 self-driving cars, where a back-up human driver is required but can be completely hands-off, is already available on the Audi A8. Level 4 automation, where the driver can snooze for the entire trip and no human back-up is needed, is predicted by car makers like Ford, Daimler, Volvo and BMW for commercial launch in three years.

In the meantime, General Motors continues testing miles and assembling comprehensive mapping data of cities such as San Francisco, Phoenix and soon Manhattan, while offering ride-sharing services with its self-driving Cruise. By removing the human driver, GM estimates that the cost of a ride can be reduced from US$2-3 per mile to a target cost of US$1 or below.2

None of these developments could have been achieved without ever more powerful chips, lower-cost sensors and cameras, and faster transmission of data. Leading GPU-maker Nvidia has been aggressively expanding its offerings of specialised processors that act as the brains of autonomous vehicles, including a recently announced system-on-a-chip (SOC) that further lifts both processing power and energy efficiency.

Meanwhile, Mobileye – now part of Intel – is advancing its fifth-generation SOC, which runs its proprietary image processing algorithms and is aiming for volume production by 2020. The company is also seeking to create a crowd-sourced mapping service where all vehicles equipped with Mobileye’s technology will gather and transmit road condition data to the cloud in real time for the server to aggregate and reconcile into an accurate and up-to-date “roadbook”, which is then made available to all vehicles on its network.

Digitisation of manufacturing

Digitisation is not just happening on our smart phones and smart cars and homes; it is happening deep inside our industrial processes. Not only products are being digitised, but also how they are developed and manufactured.

Industry 4.0 – the concept of revolutionising manufacturing through automation, data exchange, AI and the Internet of Things (IoT) – is being pursued vigorously by German industrial companies led by Siemens.

Its product lifecycle management (PLM) system operates with “digital twins” – virtual replicas that accurately simulate each aspect of the physical product and seamlessly interlinks every stage of the production process, from product inception to testing and improvement, to plant configuration and stock replenishment.

Siemens is operating two digital twin factories, in Germany and China. Any change made along any part of the “digital thread” of a product’s lifecycle is instantaneously transmitted to the other factory.

The company wants to use its digitisation platforms to transform manufacturing processes into “cyber-physical systems” in which machines and work-pieces directly communicate with each other via ubiquitous wireless connectivity and, ultimately, make autonomous decisions about the next production step.

Generative design and additive manufacturing

Digitisation is also embodied in the convergence of generative design and additive or 3D manufacturing. Companies such as Autodesk have taken computer-aided design (CAD) tools to a whole new level, employing AI-driven software to create new designs that are mathematically optimised for the desired attributes, whether it is durability, efficiency, low-cost or environmental sustainability, after exploring and evaluating thousands of alternatives in simulation.

Combined with 3D printing techniques and new alloys, polymers and other innovative materials, the results are often remarkably different from the designs conceived for classical manufacturing methods. Geometries that were once only possible in 2D drawings can now be rendered in 3D, slice by slice, layer by layer, using laser sintering, and providing unprecedented versatility.

Importantly, 3D printing is no longer confined to the domain of prototyping or hobbyists. Companies such as General Electric (GE) and Siemens, as well as a host of start-ups, have been active in developing additive manufacturing for use at an industrial scale. GE is using the technology to produce jet engine parts that are lighter and significantly more fuel-efficient, while others are 3D-printing fully functional bridges and houses.

These are just some of the themes to which we at Platinum have been paying close attention when building our portfolios. There are more. Gene therapy, precision medicine and big data are transforming disease treatment and prevention.

The digitisation of the “exchange of value” has gone beyond electronic payment systems, with blockchain and distributed ledger technology posing new challenges to traditional rent-seeking intermediaries.

What seems magical can feel distant. The reality is that these technologies are very much already here. Funding for all these innovations is aided by cheap capital. We will be managing our investors’ money with this creative destruction in mind.

About the author

Kerr Neilson is the CEO of Platinum Asset Management and a portfolio co-manager of the flagship Platinum International Fund. At 15 February 2018 Platinum’s portfolios owned shares in Alphabet Inc (parent company of Google and Waymo), BMW, Daimler AG, Intel Corporation, Microsoft, and Siemens AG.
1 https://www.wired.com/story/self-driving-cars-disengagement-reports/

2 http://fortune.com/2017/11/30/gm-autonomous-ride-share-2019/

Disclaimer: Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935 trading as Platinum Asset Management (“Platinum”). While the information has been prepared in good faith and with reasonable care, no representation or warranty, express or implied, is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in the article; and to the extent permitted by law, no liability is accepted by any company of the Platinum Group® or their directors, officers or employees for any loss or damage as a result of any reliance on this information. Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. Information presented is general information only and not intended to be financial product advice. It has not been prepared taking into account any particular investor’s or class of investors’ investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. You should obtain professional advice prior to making any investment decision.

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