By Tom Galvin and co-author Neela Datta
Doom and gloom permeated investor psychology during much of the first quarter, with fears about recession, terrorism, weak corporate earnings and monetary policy dominating the conversation. Some observers even suggested that technological advances and innovation are slowing, diminishing future growth prospects. We believe the opposite is true, as evidenced by an explosion in recent innovation and the promise of more.
To compete successfully in the information age, companies and countries must innovate consistently and continually. We believe one indicator is the number of patents granted. As the chart shows, since 1980 the U.S. and Japan have led in patents granted, with China emerging as a source of innovation since 2000. Germany and France have lagged consistently, throwing into question their ability to compete. While the path from patents to commercial product to market success admittedly can be daunting, we see this chart as evidence that the future is bright when it comes to new products and that the U.S. is a clear leader. This lead is particularly pronounced in the computer and medical areas where the U.S. has recently been granted twice as many patents as its closest competitor.
The world is clearly benefiting from the internet’s ability to connect people, share information more freely, lower costs, increase availability to products and enhance productivity. Innovative business models such as Uber and Airbnb should continue to enhance the utilization of real world assets through the internet, GPS systems, and clever programming that enables just-in-time pricing based on demand. The defense industry is likely to see increased use of drones and the introduction of “Ironman”- like body armor. Innovations in healthcare should continue as new drugs are developed, the cost of genome sequencing continues to drop and the industry moves to innovative monitoring and care of patients with chronic diseases. Blockchain technology appears to hold strong potential for new digital currency applications.
The Digital Revolution has been a key investment theme in our Core Equity holdings for several years. Video anywhere continues to grow as consumers engage content, especially video and social media sites, anywhere and anytime on smartphones and tablets made by companies like Apple. We also own Facebook and Google, two marquee technology companies benefiting from the trend of advertising dollars moving away from print and television and onto mobile and desktop. Mobile traffic is growing 50% every year, and we believe the growth potential still looks strong. We have positions in Visa and Mastercard, companies that are continuing to innovate in digital payments. These companies are well positioned as digital replaces cash and checks and as the middle class in emerging markets increasingly adopt credit cards. We own consumer companies that leverage technology to stay ahead of peers. Starbucks, one of our holdings, has used a mobile payment app and order system to increase customer loyalty and drive strong traffic growth and same-store sales. Disney has cleverly used My Magic +, a wearable device that serves as a ticket, digital wallet and room key. Disney is also rolling out demand-based pricing in its theme parks, with benefits that include improved guest experiences, reduced wait times and increased throughputs to the parks and their restaurants and attractions. At Home Depot and Lowes, customers can order products online and pick them up in the store, enhancing the shopping experience.
In summary, while investors remain rightfully concerned about macro risks, robust innovation is propelling select, high-quality companies that are a mainstay of our Core Equity strategy.
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