Top emerging companies to watch for your portfolio
Investing in the stock market is all about the long term. The longer your investment time horizon, the better chance of making returns. So it makes sense, as part of an investing strategy, to seek out the companies of tomorrow.
Apple, Microsoft, Amazon and Facebook are currently the four biggest companies in the US stock market, with Alphabet (Google) also in the top ten. Investors who believed in their stories five or ten years ago are reaping serious rewards. So how can you sniff out tomorrow’s big winners, the tech stars of the future?
James Anderson, co-manager of Scottish Mortgage, the UK's largest investment trust which joined the FTSE 100 in March, believes entire industries, from traditional carmakers to drug companies and oil giants, are destined for inevitable decline. He focuses on industries of the future, and believes Tesla, the electric car and energy storage company, could knock Apple off its perch as the world’s most valuable company in the future.
Tesla is already more valuable by stock market capitalisation than Ford and General Motors, despite making only 80,000 vehicles last year compared with Ford's 6.7 million. Some may say Tesla’s valuation is overdone, while others say it’s based on a belief that the company will become the Ford of electric cars in the near future.
You might have a hunch that cryptocurrencies like Bitcoin are about to storm the world, artificial intelligence is the power of the future, or that fintech (financial technology) is the place to look for the next Apple.
You could investigate the investment trust portfolios of well-known, long-term investors.
In Mr Anderson’s portfolio, you will find Illumina, the gene sequencing company, which he is backing to deliver a major breakthrough in healthcare as its diagnostic product becomes more widely available. Also in his top 20 are online clothing retailer Zalando, travel agent Ctrip and robotics group Intuitive Surgical. Hidden gems are also likely to be found in the fund’s unquoted holdings, not yet listed on a stock exchange, such as digital advertiser You & Mr Jones, grocery retailer HelloFresh, online directory Thumbtack, or the more familiar Dropbox, Spotify and Airbnb.
As many startups are capital-light, do not need to raise cash, and do not want public scrutiny, they are happy to remain private, which means only fund managers have a chance of buying their shares.
Six of Woodford Patient Capital’s top ten holdings are unquoted private businesses, including DNA analyser Oxford Nanopore, the digital Atom Bank, and fibre communications startup Gigaclear.
The fund’s listed investments include Prothena, a global biotechnology group, and Purplebricks, the UK online estate agent. This market disrupter has seen a fivefold rise in its value since floating less than two years ago. Woodford also buys into companies which themselves back and nurture innovative startups, such as the unlisted Oxford Sciences Innovation, and US intellectual property group Allied Minds, which is listed on the London Stock Exchange.
If you are hunting for likely targets on the UK stock market, the FTSE Small Cap index includes companies already worth at least £150 million, while firms of lower market capitalisation are classified as micro caps and found on the AIM market.
The closed-ended structure of investment trusts makes them well suited for longer-term investing, especially in smaller companies where shares may be illiquid, because trust managers are not under pressure to sell when investors decide to exit. River and Mercantile UK Micro Cap for instance has around a third in the technology sector and shows what can be achieved, with a share price gain of almost 60% in the past year, almost double the rise in the FTSE Small Cap index over the same period.
ETFs offer a passive route into smaller companies, including the technology sector. There are broad-based small cap ETFs as well as more focused funds such as the iShares IV digitalisation ETF priced in sterling, one of 11 technology ETFs listed on the London exchange. You can use our ETF screener to find the right ETFs for you.
Whether you prefer active or passive, the issues around spotting tomorrow’s titans are the same.
The dotcom boom and bust around the turn of the century shows the risks of investing in technology companies which may never become profitable businesses. A technology can race ahead, then stall when it comes to commercialising it, or be overtaken. It’s therefore important to have a diversified portfolio of holdings. Even star fund managers admit that nine out of ten tech hopefuls will never shoot the lights out - but the one that does can deliver a huge chunk of their returns.