The announcement of Xero’s proposal to delist from the NZX coincided with our recent global company research trip, which ended with a day of meetings in Silicon Valley. In general, shares of technology companies have had a strong run since the last market downturn. Regardless of the Xero decision, New Zealand investors ought to ask:
1) How do we find more of these interesting technology companies – the Xeros of the world, and;
2) How can we participate in their growth.
It is eminently clear that the world is changing quickly, and the pace of innovation is accelerating (see figure below). This Christmas, Apple’s new iPhone ‘X’ will remind us that the email receiving, internet browsing, video watching smartphone is only 10 years-old (hence the Roman numeral ‘X’)!
Figure 1: Illustrative chart of notable inventions over time
Yet, these devices have already come a long way in changing lives around the world (developed and emerging countries), for example Apple’s share price. Its market value has climbed more than 6x during this period to be the world’s largest at NZ$1.28 trillion.
How will the next 10 years look? Importantly, who is going to win?
Not all technology-themed companies will be successful. The Apples and Xeros are outliers. At Milford, analysts start by appreciating the value of the job that a product or service is trying to solve. Xero, for example, helps the essential profession of accounting save time, and by extension achieve increased productivity. In any case, in active investing it helps to have a spectrum of candidates to compare against and choose from. Here is where having a global view is an advantage.
In New Zealand, Xero is currently the only technology company in the local NZX50 share market index and this 3% weighting is at risk if it delists. In Australia, the ASX200 has a 2% weighting to the technology sector across 11 individual companies. This is in stark contrast to the US, where the S&P500 index has 24% weighting to technology across 69 companies, and China, which sees 42% of the MSCI China index invested in technology companies.
Again, having a large pool of prospects does not guarantee success. But it will improve the chances of finding an outlier, like a Xero – which has gone up in value more than 30x in 10 years.
It is common and easy to do more of what is familiar. Certainly, investors should feel comfortable in their investments. However, an inquisitive mind may wonder what else is out there. We think your investment portfolio, just as in book-keeping, should not be missing Xeros.
The Milford Global Fund has exposure to the following notable global technology companies: