GAM Investments’ Mark Hawtin on the Next Technology Wave, Disruption & Growth
Mark Hawtin is an Investment Director, responsible for running GAM Investments’ disruptive growth and technology global long-only and long/short strategies, which have been investing very selectively and effectively since 2011. Hubbis met up with Hawtin via video link recently to tap into his extensive experience of the financial markets, to hear his views on market trends and to understand more about where valuations and economic projections meet or diverge. Hawtin sees a world in which the tsunami of government and central bank liquidity continues to drive some valuations to irrational levels but where there is considerable opportunity to identify long-term growth potential amongst a variety of disruptive growth stocks. These include healthcare technology, industrial tech and transportation tech companies that will rise on the tide of what he terms Digital 4.0, the new wave of technological evolution. Many of them will not be the Big Tech giants that have caused many major indices to surge in the past decade. To identify the future winners, Hawtin and his team at GAM first identify the big picture trends, then mine down deeper into the individual companies, their management and their visions, before rigorous financial analysis determines if they make the cut. The good news is there are plenty that do, and Hawtin believes they offer great potential in the years ahead.
In a market commentary dated 24 July, Hawtin indicated that market events in the days preceding appeared to be indicative of a surprisingly uncertain future. He pointed to various surprising market vacillations including Amazon seeing USD120 billion wiped off its market cap from top to bottom in 13 July’s trading session. He also pointed to market dislocations such as Tesla then boasting a USD300 billion market cap, despite having made just 367,500 cars in the last year. That translated to nearly USD1 million market value per car, which he said was astonishingly high.
Unpredictable is the here and now
“My point was that these types of moves could go on for far longer than is rational,” he explains. “Given the unpredictable nature of market moves like that, and with a tsunami of liquidity to back up the hordes of retail buyers, especially in the US, along with a new culture of day traders that we have been seeing for some months now, I said it would be foolish to make a bold call for the top, but that caution must be advised in the short term, especially with the US election looming, the pandemic and with valuations in many parts of the market really stretched.”
In that same piece, Hawtin remarked that the disruptive growth part of the market should be viewed as one, but split into three buckets. “There are cyclical/value stocks that do not look expensive, though we have yet to see the path of the economy to recovery,” he explains. “Then there are core growth stocks, which are fair to expensively valued but not outrageously so, and then the ‘hot’ stock group, next-generation names where price action is reminiscent of the 1999/2000 bubble. It is important to divide the market like this, because there is a clear stratification, unlike previous bubbles where all names were overvalued.”
In a note on 17 July, Hawtin had also observed that further wholesale lockdowns were unlikely in major economies, in his view, and that the world was clearly entering a return to a growth phase.
“But the bigger issue is determining the level of growth we will get to when the first phase of reopening occurs,” he comments. “It is not difficult to raise traffic on the roads or airline travel numbers after falls of 90%, which would be a return to growth relative to where we were at the worst point of the lockdown. However, I am very sceptical that we will get a sharp V-shaped recovery in economic activity. In my opinion, we will see a partial V initially and then a much steadier long-term recovery path which may take two or three years before we reach the economic levels prior to Covid-19.”
A world awash with liquidity
Hawtin then elaborates on the premise of his market commentaries from July, explaining that there is clearly a significant disconnect between economic realities around the world and market indices and individual stock valuations.
“The absolutely huge wave of liquidity and government or central bank money printing, the biggest such concerted effort in history, is washing across everything out there,” he comments.
“It is fascinating to see what is happening in the US in the retail segment, for example as seen through the Robinhood platform, whereby we can see what retail buyers are buying, or perhaps more realistically gambling on. I would even say that as there are so few sports to bet on these days, people are increasingly betting on shares, but this gambling has little connection to the underlying economies. Rather, it is largely driven by liquidity.”
Hawtin observes that the bubble effect of this type of liquidity driving specific stocks, sectors and sub-sectors reminds him of the dot-com bubble of the late 1990s. “Accordingly,” he says, “as a professional investor one must be extremely careful about where to invest because there is the potential for parts of the market to fall apart spectacularly at any point. In short, the sweet spot I am looking for is stocks driven by long-term digital growth trends and where valuations have not got completely out of hand and although perhaps not cheap, are at least reasonable taking a longer-term view.”
Plenty of experience
Hawtin has plenty of experience on which to base his observations. He began his journey in the world of investments in 1983, after which a long and successful career has ensued. Prior to joining GAM in October 2008, he was a partner and portfolio manager with Marshall Wace Asset Management for eight years, managing one of Europe’s largest technology, media and telecoms hedge funds. He previously spent seven years at Enskilda Securities, initially as head of sales, before taking responsibility for the international equity business, overseeing pan-European research and trading activities and around a quarter of the investment banking staff. He is based in London.
Focusing specifically on his leadership of the largest strategy he manages, Hawtin explains that technology is at the core of all investments, but also that this doesn't necessarily mean those investments have to be in technology companies. “Actually,” he elucidates, “all the disruptive companies we invest in will have technology as the defining feature of what we believe the outcome will be for that company in terms of its growth.”
The power of disruption
He explains that disruptive refers to the potential to disrupt an existing market or to create a new market. “A really simple example for everyone to understand I think would be Facebook and Google. Both are built on technology platforms and have dramatically disrupted the global advertising market. If you were investing in disruptive technology a decade or more ago, the stocks would have had tech as a sales line item, such as software, hardware or semiconductors. Today, the disruption is coming more from names such as Amazon, Tesla, or Apple, companies that use technology to formulate their disruptive model.”
Remember – growth has been very selective
He takes a step back from specifics to comment that he fundamentally believes that the long-term success of investing in trade growth names is predicated on the understanding that growth is actually remarkably scarce, even in major indices that have been rising for years, or which have been recovering robustly since late March.
“My first premise is therefore that investors must have a portfolio approach because you just don't know what the individual success or failure of a particular company may be,” he reports.
“If you look at the biggest companies in the major indices split into 10-year increments over the last 50 years, you can see they changed pretty dramatically. Pretty much the only company which has managed to maintain its position successfully for the past several decades is Microsoft. This means you can't just go and pick one company and put all your money in it because that's too risky.”
The cycles unveiled
Hawtin explains that through to about 2008, the tech boom and bust cycles were driven by excess expectation when, in reality, there were simply not enough end users globally – as few as some 400 million installed desktop PCs by 2007.
“Then we reached a tipping point, defined by Moore’s Law, which determines when technology becomes cheap enough, fast enough and energy-efficient enough to bring about dramatic device proliferation. And that in turn brought about what's called Metcalfe's Law, which states that the value of networking increases exponentially with the number of users. So, all of a sudden, you have this opportunity to connect massive networks and create enormous value.”
The next phase…
This, in turn, means that the winners in the various segments and subsegments tend to be the dominant players. Accordingly, Hawtin elucidates, Facebook is the dominant player in mobile digital advertising, Google is the dominant player in search and Amazon is the dominant player in retail. “Because the network winner takes most in that type of environment,” he comments, “but right now I think we're reaching a slightly more mature point in those areas, and the next phase of growth, in my opinion, is going to be driven by the next phase of the network effect and that is connectivity to everything.”
Connectivity to everything refers not just to the devices in our hands. It will be the ‘Internet of Everything’, whereby everything is connected and can communicate with everything else. “And that then creates another huge network effect, combined with 5G, in other words connectivity at lightning speed, where you can have autonomous cars, for example, and you have vast data flows, AI and so forth driving many new processes and developments. This is Digital 4.0, and this is the next phase.”
Positioning is key
The risk for investors then becomes the risk of being stuck in the last phase, not positioned for the next phase.
”Instead of simply owning the major names I have discussed,” he reports, “it’s important to find those companies that will be major beneficiaries of this next phase, or rather to invest through professionals whose mission it is to do so. Our vision encompasses, for example, healthcare technology, industrial technology, transportation, all key beneficiaries of the next wave.”
Hawtin claims that he and his team want to be leaders in thinking rather than followers. “You can still make money as a follower, but not the great money, so you need to be ahead of the wave, not behind it, as this wave is the one that will roll on through the next decade,” he states.
A rigorous approach
Hawtin then offers some insights into the specifics of the investment approach he and colleagues take. He explains that they are 100% index agnostic and take a five to 10-year view on growth potential. “Then we utilise all the tools and relationships at our disposal. So if we need to really mine down into quantum computing, for example, we can immerse ourselves with true experts, or we might train ourselves up. In early 2019 I took a three-month course through the University of Oxford in blockchain technology. It was online and involved 20 plus hours a week on top of my role at GAM, but it was truly fascinating.”
The next phase is to identify the stocks that might benefit from the new wave, then begin to look into them in some depth.
”To do that,” he reports, “we spend a lot of time visiting companies, probably more than 150 companies a year on a one-on-one basis, which is something I am devout about. The only way I believe one can truly understand these companies is to see them in person. In doing so, we not only learn more about the company itself, but we learn about other opportunities around that company or in other segments of the market. In this way, we infiltrate the network and elevate ourselves within that network. It is vital to build relationships at the top levels within these companies, so we develop a real, in-depth understanding, rather than just hearing the marketing message.”
“Covid has provided its own set of issues in the world of physically getting together with companies,” reports Hawtin. “Given our rigorous approach to one to one company meetings, we clearly lose some of the finessed opportunities that occur in meeting a company on campus. There is little in the virtual world that can replace the observation of working practices or the buzz in a particular workplace. Nor do we get those nuggets or off the cuff comments that often drop during the trip from reception to a meeting room or back again post meeting. However, there are compensating factors; we get the chance to do perhaps more meetings. It is also easier to see companies in remote locations that might get missed normally. I recently commented to a colleague that attending a virtual conference had benefits. I could jump between meetings occurring simultaneously, which I could never do in the physical world –leaving a remote meeting feels less invasive.”
Models for the future
The next stage is the financial modelling of each company, with the aim of assessing valuations on an intrinsic basis. “My adherence to the intrinsic valuation framework for more than two decades has stood me in good stead throughout, helping avoid certain companies and selecting others that have outperformed. The end result of the analysis is a probability-weighted price target, and as long as we can see 30% to 50% upside, then that’s a company for us to consider further. I would describe the process as more artistic and creative at the stage of collecting the ideas and selecting the universe from which we pick, and then far more scientific as we mine down into the specifics.”
Hawtin closes the discussion by saying that neither he nor his colleagues have a crystal ball to see into the future. “We can only look from a very wide-angle at the key trends we see opening up and how they will impact the world around us and then consider which companies might benefit from these trends. We believe we are at the very early stages of the next wave and the stocks we are selecting are, we believe, going to be major beneficiaries at the heart of disruption in the next five to 10 years.”
Hawtin’s key priorities
His first mission, he reports, is doubling down on Digital 4.0, meaning identifying the core beneficiaries of IoT, 5G data and AI.
The second mission is risk managing the exit from the pandemic, as this has muddied some of the waters, accelerating trends that pre-existed but where the outcomes might be more short than longer-term. “To give you an example, there will be online retailers that have done phenomenally well because nobody's been able to go into a store to buy anything, but within the online retail world there will be plenty of companies whose sales could drop off quite sharply once the world becomes normal again. So, the exit from the world of Covid-19 is very important.”
A third priority is risk management, identifying the risk factors the fund carries relative to the broader market. “Because we are growth orientated, if we were to have a certain rotation from growth to value, that would be something that we would want to do with very careful risk management,” he elucidates. “For example, back in 2016, Amazon fell about 60%, so we need to position the fund to avoid such shifts. In 2016, about 80% of the world technology index performance was driven by companies that pay dividends, highly cash generative, and very low, no growth, all value names. But we can manage such situations with smart factor risk management.”
Getting personal with Mark Hawtin
Hawtin hails from Nottingham in the UK, and spent most of his life in London, although he was educated in rural Suffolk. Instead of university, he joined a stockbroking firm named Quilter Goodison back in 1983, just when Europe was beginning to take off as an investment universe.
“I remember rather distinctly the UK pension funds making their early decisions to invest in Germany,” he recalls, “when one of their biggest concerns was the logistical and credit risk associated with buying shares in a country that wasn't the UK. Incredible to think back on those days, but that was how it was then.”
He explains that he had actually gained a place to read Computer Science at Imperial College London, but the opportunity offered by going straight into the investment world was too appealing at the time. “From a professional point of view, I think it was a very fortuitous decision actually,” he says.
One of his most interesting times was working through the dot-com boom-bust period. “The Marshall Wace fund that I ran had positive returns in 2000, 2001 and 2002 which made it almost unique amongst equity, long-short funds and certainly amongst technology-based funds. When these seismic market shifts occur, the tide races out, and you can see who is wearing swimming trunks. The strategy we had in place saw us through those times with some excellent results, particularly against peers.”
Hawtin and his wife have a tribe of five children aged from six to 16 years old. “I am pleased to say we have been surviving the pandemic and lockdown, but as many people will attest, it has been pretty trying at times, but we have come through it pretty well.”
Hawtin has a profound love of music and almost turned professional as both an oboist and a pianist. “I nowadays spend lot of time supporting young musicians in getting their careers going. I am a trustee on the board of the Wigmore Hall, which is probably one of, if not the world's leading chamber music concert hall based in London. That remains a great passion of mine.”
Exercise involves squash and Hawtin follows rugby, with all four of his daughters playing rugby for Wasps Rugby Club in north London. “We are all passionate rugby fans, and our son even wants to be a professional rugby player, something we are supporting him in, of course. Meanwhile, my wife, who is from the US originally, is also keen for him to take up rowing, as she says he would enjoy this at college in the US later on.”
GAM Investments: Swiss heritage, global coverage, differentiated strategies
GAM Investments is an independent global asset management firm built by investors, for investors and focuses on truly active management of differentiated investment strategies.
With a 35-plus year heritage, GAM invests clients’ capital using active strategies across discretionary, systematic and specialist solutions.
Collectively, GAM manages CHF119.4 billion in assets for institutions, financial advisors, and private investors. The firm’s investment professionals, who on average have more than 14 years of industry experience, manage CHF35.5 billion in client assets. In addition to investment management, GAM also offers private label solutions, to third parties – a business that has grown to CHF83.9 billion in assets over the past two decades.
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