Tech is God – And the disruption it’s causing is intensifying

The Covid-19 pandemic is set to accelerate the growth of tech companies, as barriers to innovation are swept away, according to Baillie Gifford, the asset manager.

Douglas Brodie, lead manager of its Edinburgh Worldwide investment trust says: “Covid-19 is likely to be the catalyst to a massive digitally-powered land grab with the winners anointed over the next two to three years, versus what might have ordinarily taken 10-plus years.”

This will be matched by a hastening in the demise of stale, structurally-challenged, frequently-indebted, incumbents

He adds: “Covid-19, with its enforced and abrupt change in behaviours…strikes a direct challenge to embedded scepticism and acts to melt away inertia. We view a significant outcome of the current crisis as an acceleration in the rate of change.”

Brodie’s remarks are accompanied by news of a 16.4% rise in Edinburgh Worldwide’s net assets in the six months to April against a fall of 12.9% in the S&P Global Smaller Companies index. Data provider FE confirms it has beaten its peers, in every time period, over five years.

Baillie Gifford is one of the few UK asset managers to understand the power behind technological disruption, a key area of interest for family offices. It is the second-largest investor in electric car manufacturer Tesla behind founder, Elon Musk. 

Technology-led the stock market out of the first-quarter slump, triggered by Coronavirus.  The Fang+ index of big tech stocks is within a whisker of its record level. The squeezing of hedge fund short positions helped to make the rebound rapid, according to market participants.

Brodie believes the fastest growth will be achieved by the biggest tech players in each sector: “The strong getting stronger is a well-documented phenomenon observed in previous downturns. Our impression is that this is likely to be an even more prominent feature this time around.” 

Digital platforms and nimble disruptors will continue to develop: “This will be matched by a hastening in the demise of stale, structurally-challenged, frequently-indebted, incumbents.”

The ability of big tech to grow through capital investment and acquisition is being enhanced by interest rates set close to zero by central banks keen to bail out big employers. 

For now, relaxed antitrust regulation is facilitating the purchase of potential competitors by big tech.

One recent consolidation in telehealth saw Teladoc buying Intouch Health to spread its business from GP surgeries to hospitals. Amazon, Apple, Facebook and Microsoft have each snapped up a string of smaller companies over the past year.

Technology now accounts for 25% of the S&P 500. Its influence over other sectors could double its effective exposure. Its spread into healthcare is proving particularly rapid, as researchers rely on biotech to produce a Covid 19 cure. Alnylan, one of Brodie’s investments, aims to block the virus from replicating. 

Potential job losses are a big worry as governments seek to achieve social distancing and growth. Government bailouts often focus on oversupplied traditional sectors like steel and airlines. But technology sets the market free to keep rising.

Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers, has noted the worrying scale of future job losses. But he told New York magazine: “A lot of the stuff we’re worried about, it’s just not a big chunk of the S&P 500, so maybe we did overreact by selling off 35%.”

According to Douglas Brodie, the differential between tech-driven winners and structurally challenged companies will grow rapidly. He is continuing to invest in unquoted companies not inclined to seek a share listing at this stage.  

Like Baillie Gifford, family offices are continuing to back technology opportunities in venture capital. The speed of their investment has slowed but established VC players continue to shine.

A savvy software specialist, Insight Partners, announced a record $9.5 billion fund in April, despite a challenging first quarter for the stock market. It went on to invest $255 million in seven VC businesses over the following two months. It is tipped to raise a further $150 million for Postman, a business which achieves interactions between multiple sources of software.