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Why the US isn’t the only place to turn to for tech

18 January 2018

Carlos Moreno, co-manager of the LF Miton European Opportunities fund, considers the investment opportunities within the European technology space.

By Carlos Moreno,

Miton Group

Europe’s economic recovery continues to gain momentum, supported by strong data in areas like employment and consumer confidence.

Some investors remain sceptical, creating a value opportunity. The opportunity for stockpickers is strong, Europe is home to a wealth of global companies, and thanks to its prestigious universities and highly skilled workforce it’s a fantastic hub for innovation, especially in high-end technology and technology-related areas.

While investing in tech is often taken as investing in US internet giants - Facebook, Amazon and Google - there are plenty of other, lesser-known European brands that are leaders in their industry.

When choosing which companies to invest in, we focus on return on capital invested, barriers to competition and long-term growth opportunities, and the tech sector is proving a fruitful hunting ground.

There are many companies that continue to grow, creating jobs and investment opportunities. They are often asset-light (think people in an office or lab) and have patents or other intellectual property to protect their profitability.

Interroll, the manufacturer of rollers and belt sorters, is a good example. The company supplies a superior product to its competitors and has outstanding pricing power as a result. A classic Swiss engineer, it is dominant in its niche and charges premium prices for premium performance, which allows for better margins and reinvestment. It also benefits from mega trends such as the automation of logistics and manufacturing robotisation. Because of very low barriers to entry for internet retailers, it’s hard to know who the winners will be. But whoever wins, Interroll wins too.

Another strong internet-related technology player is Scout24, currently the top holding in the fund. This is a German property and auto sales portal – the equivalent of a combination of the UK’s Rightmove and Autotrader. With a number of small countries in Europe, classified advertising is still very local and mainly offline. Scout24 is already dominant in listings volume, but it’s really only now starting to upsell higher impact premium listings that is helping to deliver robust top and bottom line growth.

 

A similar business is Norwegian company, Schibsted is an international media group that owns leading newspapers in Sweden and Norway but which has also been hugely successful in moving online, and is now one of the leading online classified ads businesses operating in 22 countries.

Language barriers also help Xing, the German version of LinkedIn. User listing businesses like Xing benefit from a winner-takes-all business model - why go to the number two site if everybody is on the number one site?

Prospects are bright for internet-savvy banks. Big banks tend to run an inefficient hotchpotch of back office systems, for a wide range of customers and through a myriad of distribution channels. Future winners, such as SBanken in Norway or Banca Fineco in Italy, have only one modern back office, focus on a narrow range of customers and use internet as the only distribution channel. This produces a virtuous circle of the lowest prices, driving strong customer growth and improved marginal costs.

Pure software company Temenos can help existing banks try and catch up with these companies by improving the efficiency and effectiveness of existing banking technology without the need for replacing entire operating systems.

Lastly, let’s not forget medical technology. Technology drives healthcare more than any other force and affordable access to medical technology will be key for an ageing population. Europe excels in this area through companies such as Carl Zeiss Meditec, the German producer of intraocular lenses for the treatment of cataracts, and Amplifon, an Italian company specialising in digital and invisible hearing aids.

A lot of progress has also been made to better understand the human microbiome. Nurturing good bacteria in and on our bodies has tremendous potential to improve our health and wellbeing. Why, for example, use toxic aluminium salt on your armpits to kill bacteria when you could apply friendly bacteria to crowd out the noxious ones?

That’s where 'probiotic' companies like BioGaia and Chr Hansen come into play. The industry enjoys good pricing as those companies have intellectual property rights over the strain in that application (for example as a colic treatment in BioGaia’s case).

The world is changing at an ever-faster pace and those businesses that are investing and taking advantage of the new technologies today will be the winners of tomorrow.

Carlos Moreno is co-manager on the LF Miton European Opportunities fund. All views are his own and should not be taken as investment advice.

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