Where are the opportunities for investing in ‘bottlenecks’?
Rapid growth in emerging technologies like AI has led to sizeable profits but parts of the supply chain are struggling to keep up. Monks Investment Trust is convinced by the potential of firms investing in these opportunities.
The past decade has been a busy time for global markets, which have experienced countless shocks and transformations.
Each shock inevitably creates winners and losers. Take Nvidia for example. In 2016, few would have expected that a firm specialising in making computer components for gaming would become the most valuable company in the world – and yet it has.
Nvidia’s valuation is a result of it occupying a unique position. The firm’s chips, initially made to help process computer graphics for video games, are now incredibly valuable to the development of AI models.
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Nvidia was, and still is, a leader in a market segment where demand for its goods increased faster than supply – it occupied a ‘bottleneck’.
These bottlenecks – firms with a unique place in markets that will be vital in a changing economy and showing the potential for generating value – hold clear appeal for the managers of Monks Investment Trust (LON: MNKS).
Monks is run by Baillie Gifford, the investment manager which also looks after the Scottish Mortgage Investment Trust (LON: SMT), one of the most popular funds for DIY investors.
While both trusts aim to invest in themes and companies with the potential to change the world, Michael Taylor, one of the managers of Monks, said the two trusts take different approaches.
Taylor said: “Some do things that will not strike you as exceptional but they do it well and the returns to shareholders may well be exceptional in the long run. We seek out and celebrate a diversity of growth businesses.”
That diversity is reflected in its holdings. Compared with the more concentrated Scottish Mortgage, where the top 10 names make up around 54% of the portfolio, Monks’ top 10 comprise around 36% of its total.
Growth investing in the age of the hyperscaler
Broadly, Monks’ investments sit in one of three categories: rapid growth, growth stalwarts and cyclical growth.
Rapid growth businesses include publicly listed firms like Nvidia, Alphabet, Amazon and other big-tech darlings, including SpaceX.
While these stocks have dominated broader index returns, their rapid growth has meant that more diversified trusts like Monks, which is long-term growth-oriented, has struggled to beat its index in recent years.
Further, the rapid nature of big tech’s growth means pressure on the resources needed to support it, with parts of the value chain unable to respond fast enough.
Taylor said this is where such bottlenecks are found, and where subsequent value can accrue.
Investing in the AI bottleneck
“What has often been in scarce supply historically has been intelligence. Coders, designers and skilled, knowledgeable workers. The business models that dominated had these people and they didn’t need much of the physical stuff,” said Taylor.
However, with the AI revolution, requisite intelligence is becoming less scarce and this trend may be set to flip.
Now, these opportunities – the AI-centred resources in short supply – are not human but physical. Taylor is looking at data centres and semiconductors, for example.
Take Disco Corporation, a Japanese firm that Taylor pointed out occupies a niche part of the AI value chain. It makes precision tools for use in the semiconductor industry, producing machines that can cut, polish and grind silicon.
As chips continuously decrease in size the demand for Disco’s machines, which cut silicon to a fifth of the width of a human hair, looks set to increase. The business is well-placed to provide growth in this area.
Taylor also picked out Freeport McMoRan, a copper miner heavily geared towards the US. It is set to benefit from higher copper demand as a result of increased electrification, including additional AI-related infrastructure like data centres.
Freeport’s US tilt is the bottleneck Monks has identified. In a world of tariffs, it is well-placed in the supply chain to provide copper to US firms, Taylor said.
But he added these positioning advantages are not enough for a firm to be successful.
“Not all businesses in the real world will develop or provide great outcomes. You need to pick the right companies with the right teams, and you need to pick a bottleneck which will endure through time.”
An ageing population presents unique opportunities
None of us are getting any younger. Quite the opposite, for some developed economies, where the birth rate is declining and life expectancy growing .
In 2022, around 19% of the British population was aged 65 or over but projections warn that by 2072, this figure could rise to around 27%.
It is a similar story in the US, where around 18% of the population is 65 years or older and projected to rise to 23% by 2050.
An ageing population presents both unique challenges and opportunities.
One example is the funeral industry, where an increasingly older population and rising death rate is set to increase demand for funeral services.
Taylor named Service Corporation International, which lands in the ‘growth stalwart’ category of Monks’ investments – firms he described as growing at a “statesman-like pace”.
Service Corp seeks to professionalise and consolidate the funeral industry. The company has been long-held by Monks as it’s set to benefit from the rising death rate that comes with an older population.
Taylor noted this investment is “far from exciting, but it’s steady, it’s dependable and grows at an above-index rate. It’s the biggest company in that industry and yet it is only 15% of the market, so we expect that figure to go up over time.
“Now, the market is always expecting that kind of business to experience a fade in its growth rate but we have the confidence that the duration of its growth is going to be remarkable,” Taylor added.
Growth can be found in less obvious places too
While the prevailing narrative in the market is how AI will transform (or potentially crash) the economy, Taylor noted that such narratives are simplifications, with the real world much more complex.
“There is a world of growth beyond just artificial intelligence,” he said.
Healthcare, for example, saw funding dry up after the pandemic. While that period itself was difficult for healthcare firms, it presents a new opportunity.
For example, access to new drugs. The bottleneck here is the length of time it can take for newly discovered drugs to come to market as smaller biotech companies can find it difficult to deal with the process.
Last year, Monks looked at this growth opportunity and invested in a firm called Medpace that designs, implements and analyses clinical trials for smaller biotech firms, helping reduce the time for their drugs to come to market.
Another example is Ensign Group, which Monks also invests in. This firm specialises in running nursing facilities that provide assisted living, rehabilitative and post-acute care. It has expanded to take care of over 300 businesses offering these facilities, and demand is set to soar with an ageing population.
While healthcare is perhaps less exciting than AI, it nevertheless has the potential to tell an exceptional growth story, bringing possible profits for investors who correctly identify the firms best-placed to make the most of a world full of bottlenecks.
