Signs of breakthrough
Hamish Douglass argues technology’s exponential growth could transform global equity opportunities sooner than anticipated.
The demand for inexpensive technology is rapidly expanding all around us and is fundamentally changing the way we work, play and communicate.
In turn, this is transforming the way businesses operate and the rules that industries work to. Hamish Douglass, Chief Executive Officer of Magellan Asset Management, points out that this exponential growth is currently accelerating change across a magnitude of sectors.
In fact, according to Moore’s Law (coined in 1965), the capacity of a microchip doubles every two years. This is often seen more widely to apply to the rate of technological development.1
Chart 1 (below) provides a comparison between linear and exponential growth trajectories, showing how marginal the output difference is in the earliest years of growth, and how divergent thereafter. Chart 2 illustrates that, once the process of technological improvement has reached around 25 to 30 years, the growth rate accelerates steeply. The number and extent of today’s technological breakthroughs provide an illustration of this in action.
Products like the iPhone are more powerful than Cray-2, which in the 1980s was the world’s most powerful supercomputer. In fact, 1981 is widely seen as the launch year for mass-market personal computers – and many of the most transformative breakthroughs in computing have only been achieved in recent years. So what might this mean for everything from cars to phones to computers 20 years from now? Douglass believes a wholesale change is just beginning.
“We’re going to have a mass shift in productivity for households across the world,” says Douglass. “As the prospect of driverless cars is set to revolutionise the automotive industry, I don’t doubt that in the next 15 years’ technological advances will highlight the inefficiency of cars and driverless car sharing will be introduced.”
If this prediction proves universally applicable, then the shift from private car ownership would see the average UK household save the cost of a car.2 A typical vehicle is stationary for 23 hours a day and incurs costs to purchase, insure, maintain and park. All of these contribute to the growing demand for accessibility over ownership.
However, consumers aren’t always responsible for driving demand. The big five tech companies (Amazon, Apple, Facebook, Google and Microsoft) are renowned for investing in research and development. In 2015 for example, Amazon spent $12.5 billion on R&D. While this total may seem extraordinary, it was still $700 million less than that spent by the German car manufacturer, Volkswagen.
Leading tech companies often use acquisitions to stay ahead of market trends. In 2014, Google acquired DeepMind Technologies, an artificial intelligence company. DeepMind had developed a computer program under the name of AlphaGo that was designed to play Go, the ancient Chinese board game, against a human competitor.
This was by no means an easy task, as a game of Go has more possible board layouts than the total number of atoms in the visible universe. With this many possible combinations, even with the exponential growth in processing power, no computer is able to calculate each possible outcome. The program was therefore encoded to ‘think’ with limited information, in a process similar to that of the human brain. In March 2016, AlphaGo had beaten the 18-time Go world champion 4–1.
“This was a seminal moment for those who believed it would be more than a decade before this degree of artificial intelligence was possible,” says Douglass.
Digital personal assistants, such as the Amazon Echo and Microsoft’s Cortana, represent another recent development in machine learning. These products can organise meetings, flights and dinner reservations through voice activation while acting as an intermediary on consumers’ behalf.
What does this mean for investors? While traditional industries often experience disruption through innovation; for some organisations, continuity is just as important.
“Apple Inc. is really interesting from Magellan’s perspective,” says Hamish Douglass. “To understand Apple’s value, you must recognise the size of the user base. As iPhones tend to be replaced every two and a half years, the iPhone sales of today represent a combination of the user base two years ago and first-time buyers.
“The user base was 340 million phones two years ago – they don’t give you these numbers, you have to conduct the analysis to work it out – and 150 million of these came from 2014. We know that the user base this year is 500 million and we are confident that from this number 220 million will make repeat purchases in the future,” says Douglass.
Irrespective of size, those companies that continue to innovate and improve will have a better chance of survival and of creating long-term value.
1 Moore’s Law (1975) states, “The number of transistors in a dense integrated circuit doubles approximately every two years.”
Hamish Douglass is a manager of the St. James’s Place International Equity Fund. The opinions expressed are those of Hamish Douglass and are subject to market or economic changes. This material is for information only and is not a recommendation or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.